FCA publishes response on oversight of LDI funds

By Zhuan Faraj

On 25 October 2022, the UK Parliament published a letter from Nikhil Rathi (CEO of the FCA) to the Chairs of the Industry and Regulators and Economic Affairs Committees of the House of Lords.

This is in response to the Chairs’ letter of 14 October, which asked the FCA to provide information on how it oversees liability-driven investment (“LDI”) funds and what steps it has taken in recent years to minimise the risk to consumers imposed by the collapse of DB pension funds.

LDI funds and their managers

In this latest correspondence, the FCA details its interactions with LDI fund managers in recent months. Namely:

• In March 2022, the FCA contacted the largest LDI fund managers asking about their plans to deal with increased volatility and to absorb volatility in excess of the previous scenario analysis. It also probed large managers on the speed with which they could call money from underlying pension funds in the event of stress.
• In May and June 2022, the FCA saw these funds subject to significant margin calls, which they met according to their plans without systemic issues or concerns.
• By Thursday 22 September, firms had buffers in place to deal with greater market stress than they had experienced previously.

Market stress

During the Bank of England’s intervention following the mini-budget, the FCA worked closely with fund managers to ensure they took advantage of the time provided by the Bank of England’s to de-leverage and to recapitalise LDI funds, which they have done.

Additionally, the FCA and the Bank of England have been working closely with LDI managers to ensure they have increased resilience to deal with possible future volatility.

Protection of DB scheme members

The letter stresses that, contrary to some press reports, the FCA has no indication that this episode put at risk the solvency of DB pension funds. In the proximate worst-case situation, the FCA was concerned pension funds would have lost their LDI hedges, but it should not have threatened their solvency.

The FCA’s letter can be read in full here.

For further UK financial services regulatory updates, please visit the Burges Salmon blog.