Central Bank Introduces New Measures for LDI Funds

The Central Bank of Ireland has announced the introduction of macroprudential measures for Irish-authorised GBP-denominated Liability Driven Investment (LDI) funds.

Building on the recent Consultation Paper – Macroprudential measures for GBP Liability Driven Investment funds – the measures require that GBP-denominated LDI funds authorised in Ireland maintain sufficient resilience to be able to withstand sudden and adverse shocks to UK interest rates.

The Central Bank’s objective in codifying the yield buffer is to safeguard the resilience of GBP-denominated LDI funds such that they do not amplify stress in the UK gilt market as they did over September-October 2022. LDI funds contributed to the disruption in the UK gilt market due to their excessive use of leverage.

Given the cross-border nature of GBP-denominated LDI funds, the Central Bank of Ireland has sought to ensure international coordination in codifying these measures by working closely with the Commission de Surveillance du Secteur Financier (CSSF), UK authorities, the European and Securities Markets Authority (ESMA) and relevant stakeholders since the beginning of the UK gilt market crisis. As a result of this ongoing coordination, the CSSF is also announcing today an aligned framework of measures for GBP-denominated LDI funds managed by asset managers in Luxembourg.

Governor of the Central Bank of Ireland Gabriel Makhlouf highlighted the importance of international coordination in this area. Governor Makhlouf has said, “The gilt market disruption of 2022 demonstrated how financial vulnerabilities in non-bank financial intermediation can amplify adverse shocks to the rest of the financial system and the broader economy. The macroprudential measures announced today aim to safeguard the resilience of sterling LDI funds, and – in doing so – support financial stability at a global level. Given the cross-border nature of capital markets, achieving that outcome requires effective international coordination. The Central Bank has worked closely with relevant authorities from across Europe to ensure consistency in the policy measures taken to safeguard the resilience of sterling LDI funds.”

(Source: Central Bank of Ireland)

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