(Adds Pensions Regulator)
By Huw Jones
LONDON, April 24 (Reuters) - Britain's financial
watchdog on Monday set out guidance on stress testing and risk
management for liability driven investment (LDI) funds, saying
it was a "matter of urgency" to implement them.
Last September's near meltdown in the sector, when yields on
UK government bonds rocketed following a government budget
statement, left LDI funds scrambling to find extra collateral.
The Bank of England had to intervene to buy UK government
bonds, helping to bring down yields and relieve pressure on LDI
funds.
The BoE's Financial Policy Committee set out policy
recommendations last month to bolster LDI liquidity buffers on a
permanent basis, and on Monday the Financial Conduct Authority
began fleshing out these recommendations.
"Where they have not already done so, we expect LDI managers
to complete and embed as a matter of urgency all necessary
improvements to their operating practices to address the
deficiencies identified," the Financial Conduct Authority (FCA)
said in the new guidance.
"Some of the weaknesses these events highlighted are
unlikely to be unique to the LDI sector."
Britain's Pensions Regulator also published guidance on
Monday which said trustees of pension schemes should ensure that
LDI funds have a liquidity buffer to cope with day-to-day market
moves, and a separate buffer for times of severe market stress.
LDI funds are listed in Luxembourg and Ireland, where
regulators have also tightened rules, but managed in London to
help UK pension schemes ensure they can meet long-term payout
commitments.
Sarah Pritchard, the FCA's executive director for markets,
said the LDI sector is now more resilient but more needs to be
done.
"This guidance sets out what we expect in terms of risk
management, stress testing and client communication, so that the
necessary lessons are learned from last September’s extreme
events. Many of these lessons will be relevant to firms beyond
the LDI sector," Pritchard said.
Problems with LDI has thrown a spotlight again on the wider
non-bank sector and sufficient liquidity to ride market shocks
unaided.
(Reporting by Huw Jones
Editing by David Goodman, Louise Heavens and Andrew Heavens)
Messaging: huw.jones.thomsonreuters.com@reuters.net))
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.