FCA guidance strengthens resilience to future crises:
We welcome the FCA’s statement and are particularly pleased to see it encouraging asset managers to better understand their clients’ liquidity waterfalls, and to ensure operationally clients are able to deliver collateral to their LDI vehicles within five days or sooner. This is likely to lead to more schemes consolidating their LDI and collateral assets with a single manager, which in our view is ultimately a simpler, better and more cost-effective solution than many schemes currently have.
We are also pleased to see that the FCA expects manager to have established a crisis response protocol which explicitly covers resourcing. The resourcing issues many LDI managers experienced during the crisis exacerbated the problem as it meant schemes were often required to make decisions with little or no information. Improvements here are critical to help schemes navigate the next crisis, whatever that may be.
TPR guidance welcomed, but more detail required:
We also welcome the updated guidance from TPR, which will ensure LDI funds have greater resilience, and that they are likely to be able to withstand a similar crisis to that seen in the gilt market last Autumn. It is helpful that the guidance builds on statements by the Bank of England and national competent authorities, so schemes which have started implementing new LDI frameworks based on those statements are unlikely to need to make significant changes.
However, the Regulator should provide more guidance on what constitutes “periods of stress” where schemes can operate LDI hedges below the minimum resilience level of 250 bps. This would help trustees plan better and avoid reckless prudence in the amount of collateral set aside to support LDI hedges.
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