By Victoria McCarron and Alex Gillespie
On 24 April, the FCA published guidance for asset managers with a view to increasing resilience of Liability Driven Investment (LDI). The guidance has been prepared by the FCA in response to last year’s LDI crisis, where a spike in gilt yields caused a rapid increase in collateral calls and forced gilt sales, which ultimately created a material risk to all LDI strategies and particularly LDI funds.
The FCA publication follows guidance from the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier (which are the main regulators of the LDI funds) and the Pensions Regulator on their expectations as to how LDI resilience should be maintained in the short-term. In March 2023, the Bank of England’s Financial Policy Committee, set out how resilience of LDI funds should be addressed on a more durable basis. The FCA’s guidance is intended to provide recommendations to address specific vulnerabilities that arose with LDI managers.
The FCA says that it saw significant deficiencies in the management of risk by LDI managers, including stress testing and scenario planning, communications and client servicing and operational arrangements. The FCA guidance sets out its recommendation on how firms can increase their resilience to future market volatility across each of these areas.
The FCA expects LDI managers to complete and embed as a matter of urgency all necessary improvements to their operating practices to address the deficiencies identified and it will be working with firms to assess their progress in addressing vulnerabilities. The FCA expects other market participants to also consider their own practices and to take appropriate lessons from the relevant observations in the guidance.