The Financial Conduct Authority (FCA) has published a series of recommendations for asset managers designed to increase resilience of Liability Driven Investment (LDI) funds. The guidance sets out what is expected in terms of risk management, stress testing and client communication so that LDI managers can address risks to market integrity and financial stability.
Sarah Pritchard, executive director for Markets at the FCA, said in a statement: “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, the FCA has 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, she added.
Liquidity buffers, for example, should be set for each sub-fund at a level that allows them to: withstand severe but plausible stresses in the gilt market; meet margin and collateral calls without adding to market stress; and withstand the foreseeable demands that may be made. Stress tests, and the contingency plans created to deal with stress events, should also consider multiple and simultaneous scenarios.
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.