The Bank of England said on Tuesday that liability-oriented investment (LDI) funds are now better prepared to manage shocks such as the one triggered by the government’s fiscal plan in September, and the risk of another dynamic of “incendiary sale” of gilts was significantly reduced.
Pension funds were forced to offload billions of pounds of UK government bonds at prices befitting a stressed environment earlier this month after a government package of tax cuts sent yields soaring, triggering margin calls. in derivatives designed to protect funds against rate movements.
The Bank of England had to intervene with bond purchases to stabilize the market.
“Taken as a whole, LDI funds are now significantly better equipped to manage shocks of this nature in the future,” British central bank vice president Jon Cunliffe said in a letter to Parliament’s Treasury Select Committee.
“As such, the risk of LDI fund behavior triggering ‘fire selling’ dynamics in the gilt market and self-reinforcing declines in gilt prices has been significantly reduced.”
LDI funds have asked for much higher levels of collateral in recent weeks to protect against sharp movements in yields, with the authorization of regulators, industry sources told Reuters.
They estimate that pension schemes would need to sell at least £300bn of assets to meet these collateral calls.
Cunliffe said the Bank of England will continue to monitor market conditions and work with regulators on lessons to be learned from recent financial market tensions, specifically pointing to a global push for reform of the regulation of non-bank financial institutions, which includes funds. of pension.
Source: CNN Brasil
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