Esma gives green light to sterling LDI buffer post UK bonds crisis

The European financial regulator Esma has given the green light to Irish and Luxembourg regulators to impose an extra safety cushion on funds that invest in UK government bonds and are denominated in pounds sterling.

The move follows the UK government bonds crisis in September 2022 which coincided with Liz Truss’s brief tenure as the UK’s prime minister.

The development means that sterling-denominated liability-driven investment (LDI) funds must prove they have enough money set aside to handle a significant increase in UK government bond yields by 300 basis points (or 3 percentage points).

The new “yield buffer” requirement is aimed at making sure these funds can withstand potential market fluctuations without collapsing.

Jo Burnham of fintech firm OpenGamma said the development is needed as it can take two to three days for pension funds to liquidate their assets to meet their margin obligations.

“This is why EU pension funds exposed to UK gilts need to have a far greater understanding of the capital that they need to have to meet the cash flow requirements to identify liquidity challenges during the trading day.

“This is the only way they can start liquidating their assets much sooner in the event of another unwelcome fiscal policy rocking debt markets.”

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