The FCA has published a series of recommendations for asset managers designed to increase resilience of Liability Driven Investment (LDI) funds.
Following the recommendations set out recently by the Bank of England’s Financial Policy committee, the FCA has set out guidance around risk management and operational arrangements for LDI managers so that they can address risks to market integrity and financial stability.
Sarah Pritchard, Executive Director, Markets at the FCA, said: 'We have been clear that asset managers must take the necessary steps so that their LDI portfolios are resilient to future market volatility.
'Since September last year, we have been closely monitoring asset managers using LDI strategies as they make improvements and the sector is now much more resilient to potential risks, but there is more 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.'
Since the events that occurred in the gilt market in September 2022, the FCA has been working closely with its regulatory partners in the UK and internationally. The FCA has also been engaging directly with firms involved in the management of LDI portfolios to develop and maintain increased resilience to deal with possible future volatility.
The FCA will continue to work with regulatory partners in engagement with this sector on implementing or complying with any further guidance or requirements issued by other authorities, including the Financial Policy Committee recommendations of March 2023 and The Pension Regulator’s guidance issued in April 2023.
Notes to editors
- Further guidance on enhancing resilience in Liability Driven Investment.
- FCA welcomes statements by TPR, CBI and CSSF on resilience of LDI portfolios, November 2022.
- The structure of the LDI market is such that there are differences in regulatory oversight for the various participants: pension schemes, product managers (such as managers of alternative investment funds), investment consultants, investment banks and portfolio managers. The FCA is responsible for the authorisation and regulation of UK-based fund managers. These FCA-authorised entities are typically responsible for the execution of investment strategies in respect of the assets which have been delegated to them by the product manufacturer, typically the non-UK domiciled alternative investment fund manager (AIFM).