The Financial Conduct Authority (FCA) has provided guidance on risk management and operational arrangements for LDI managers in response to the recent recommendations made by the Bank of England’s Financial Policy committee so that they can address threats to market integrity and financial stability.
The FCA and its regulatory partners in the UK and elsewhere have been collaborating closely since the events in the gilt market in September 2022. To build and maintain improved resilience to handle any future volatility, the FCA has also begun interacting directly with companies managing LDI portfolios.
The FCA will continue to collaborate with regulatory partners in its engagement with this sector to implement or adhere to any additional requirements or guidance issued by other authorities, including the recommendations of the Financial Policy Committee from March 2023 and The Pension Regulator’s guidance from April 2023.
FCA executive director Sarah Pritchard says: “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, we have 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.
“This guidance sets out what we expect in terms of risk management, stress testing and client communication, so that the necessary lessons are learned from last September’s extreme events. Many of these lessons will be relevant to firms beyond the LDI sector.”
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