Luxembourg’s financial supervisor CSSF on Monday said it expects managers of Liability Driven Investment funds, also known as LDI funds, to maintain yield buffers set last year at levels introduced to make these funds resilient to the UK Gilts crisis.
The yield buffer was set “in the region of 300-400 basis points” for funds denominated in British pounds. CSSF said that it also expects managers of LDI funds in other currencies to “maintain a sufficient level of resilience enabling them to absorb severe but plausible market shocks”.
LDI funds are popular as a risk management tool for pension schemes and insurance companies. LDI funds denominated in British pounds however proved to be vulnerable to the crisis in the UK Gilts market. The buffers were introduced as a temporary measure by national supervisors in Luxembourg and also Ireland following the UK gilts crisis. The European Securities and Markets Authority, Esma, has endorsed this approach.
CSSF on Monday said it noted the publication of a Bank of England paper last week with a recommendation and explainer on minimum resilience for liability driven investments. The BoE paper said that “the level of resilience might erode over time in the absence of a clear long-term approach”, which led CSSF to issue a statement requiring funds to maintain this yield buffer.
“While the CSSF continues to engage with alternative investment fund managers and relevant authorities in order to ensure that the structure of LDI Funds provides on an ongoing basis for a resilient set-up, it would like to remind that pending the outcome of this ongoing follow-up work, it expects at the current juncture, investment fund managers managing LDI Funds denominated in GBP to maintain the Yield Buffer in the region of 300-400 basis points as build up following the September 2022 episode,” it said.