FCA to maintain supervisory focus on LDI issues

The Financial Conduct Authority (FCA) has welcomed recent regulatory statements on liability-driven investments (LDI), confirming that it will maintain a supervisory focus to ensure vulnerabilities are addressed following the issues faced by defined benefit (DB) schemes.

The FCA welcomed the recent statements on the resilience of LDI portfolios and the operational governance of pensions schemes using LDI strategies from both The UK Pensions Regulator (TPR), and the Central Bank of Ireland and the Commission de Surveillance du Secteur Financier (CSSF- Luxembourg).

“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,” it stated.

“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.”

Adding to this, the FCA confirmed that it expects asset managers 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.

However, the FCA clarified that measures such as liquidity buffers, while necessary, are only a partial solution as there can always be events or conditions that exceed them.

In light of this, it encouraged managers of LDI funds to learn lessons from the recent events to understand and reduce the consequences in tail events, including operational lessons, the speed with which they are able to rebuild buffers or rebalance funds, 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," the FCA continued.

"As in this event, participants should also consider the risk profile and systemic dynamics of events that could conceptually occur beyond this."

Looking ahead, the FCA confirmed that it 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," it stated.

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