Nikhil Rathi, CEO, Financial Conduct Authority
Regulators have told defined benefit pension funds to build up their liquidity buffers to cope with any further big hike in gilt yields when BoE support ends on Friday
London:
Britain’s financial watchdog told pension funds on Wednesday to “really focus” on building up liquidity in their liability-driven investment (LDI) strategies before the Bank of England ends support for the government bond market on Friday.
UK government bond yields began surging last month after Britain announced a package of unfunded tax cuts.
This forced the Bank of England to buy gilts to ease pressure on pension funds facing big collateral calls on derivatives in their LDI funds.
Regulators have told defined benefit pension funds to build up their liquidity buffers to cope with any further big hike in gilt yields when BoE support ends on Friday.
“What’s really important right now is that everybody involved in this situation, the pension funds, the managers, the bank counterparties, really focus on the work they need to do in coming days to ensure there is resilience in the system,” Financial Conduct Authority CEO Nikhil Rathi told reporters.
Rathi said “lessons need to be learned” to come up with “strengthened” standards for asset managers, which the FCA regulates, but added that the moves in gilts went beyond historical precedent and stress testing to date.
There were strains elsewhere in non-bank finance that the FCA is also monitoring, Rathi said. The jump in gilt yields prompted banks to abruptly withdraw hundreds of mortgage products, which use UK bond prices for pricing purposes.
Mortgages already offered before products were withdrawn should be honoured, Rathi said.