Bank of England Tells Regulators To Move Fast On LDI Reform After Mini-Budget Crisis

• The Bank of England on Wednesday told regulators to move fast to toughen rules for funds used by Britain's pension industry which nearly collapsed last year after former Prime Minister Liz Truss' "mini-budget."
• The BoE said Britain's banking system was not at risk from the kind of turmoil that has beset some banks in the United States and Switzerland's Credit Suisse. However, the BoE's Financial Policy Committee called on pension regulators to act "as soon as possible" to mitigate the risks posed by liability-driven investment (LDI) funds.
• The BoE was forced to launch a new round of government bond purchases after the announcement by Truss' government of major unfunded tax cuts last September triggered a surge in gilt yields and a spiral of collateral calls and further bond sales.
• LDI funds should set aside enough liquidity to ensure they can withstand a surge in government bond yields of at least 250 basis points on top of other protections against market swings, the BoE said on Wednesday.
• In practice, LDI funds, which are widely used by pension schemes to ensure payouts to pensioners, will have to permanently hold liquidity buffers of around 300-400 basis points, as they have had to do after the mini-budget crisis.
• The Financial Policy Committee (FPC) also said there is a need to toughen the resilience of money market funds (MMF), used by companies for day-to-day financing, and UK regulators will publish a consultation paper on MMF regulation later this year.
• The central bank will also set out in the second quarter details of its first "exploratory scenario" to investigate how banks and non-banks react collectively to market stresses. The move is the latest sign of how central banks are taking a closer look at non-banks, which are regulated by securities watchdogs which have traditionally resisted such moves.

(Source: Reuters)