Statement on Liability Driven Investment (LDI)

The FCA welcomes the statements made today by The Pensions Regulator, the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier (CSSF- Luxembourg) on the resilience of Liability Driven Investment (LDI) portfolios and the operational governance of pensions schemes using Liability Driven Investment strategies.

Since the events that occurred in the gilt market, the FCA has been working closely with its regulatory partners in the UK and across Europe. The FCA has also been engaging directly with firms involved in the management of LDI portfolios to ensure they have increased resilience to deal with possible future volatility.

The FCA expects asset managers to take any necessary or appropriate action following these communications and that they operate their products and services in a way that will not create risks to market integrity or financial stability. Measures such as liquidity buffers are a necessary but only partial solution as there can always be events or conditions that exceed them. Managers of LDI funds should learn lessons from these events to understand and reduce the consequences in tail events. These include operational lessons, the speed with which they are able to rebuild buffers or rebalance funds, client and stakeholder engagement, and reliance on third parties.

All market participants should factor recent market conditions into their risk management, and should adopt a wider horizon of events that might be considered extreme but plausible. As in this event, participants should also consider the risk profile and systemic dynamics of events that could conceptually occur beyond this. The FCA will maintain a supervisory focus to ensure vulnerabilities identified during the period are addressed. We are reviewing lessons learned and engaging with firms on their operational contingency planning, and intend to publish a further statement on good practice towards the end of Q1.