The "complete absence" of data on leverage in LDI funds will
also be addressed, she added.
"We don't have basic data, whether it's the size of funds,
the assets that are held, the exposures that they have, the
leverage... it will need to be an important part of the steady
state resilience framework from here."
(Reporting by Huw Jones;
Editing by Alison Williams and Jane Merriman)
(Recasts with more detail)
By Huw Jones
LONDON, Feb 1 (Reuters) - The Bank of England will set
out a tougher framework next month to regulate liability-driven
investment (LDI) funds, which could put them out of reach for
some pension schemes, BoE executive director Sarah Breeden said
on Wednesday.
LDI funds have been used by pension schemes to ensure they
can meet payouts to pensioners in future years.
But turmoil in the British government bond market in
September triggered by former Prime Minister Liz Truss's radical
tax cut plans caused problems for these funds.
Yields on the government bonds or "gilts" held by LDI funds
rocketed, and the funds struggled to meet urgent collateral
calls to cover the fall in bond prices. The BoE had to intervene
to buy gilts to help bring yields down.
"We will set out resilience outcomes that we want to see and
if there are some schemes, perhaps because they are so small
they are unable to meet those standards, it's a reasonable
question whether an LDI strategy is appropriate for them,"
Breeden said.
"I don't think that it needs to be banned outright."
Breeden said LDI funds have been told to hold bigger
liquidity buffers as an interim measure until "steady state" or
permanent requirements will be set out in a statement from the
BoE's Financial Policy Committee in the second half of March.
The rules will set out principles on leverage and liquidity,
which will require an LDI fund to be able to replenish liquidity
quickly and smoothly, and that risks from using LDI funds are
properly understood, Breeden said.
The Pensions Regulator, which regulates pension schemes, and
the Financial Conduct Authority, which regulates managers of LDI
funds may have additional requirements, she said. Regulators in
Luxembourg and Dublin, where LDI funds are listed, will also
have their own requirements.
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