The Pensions Regulator has noted that as of end-2021, c. 15% of the roughly £ in UK LDI assets were in multiinvestor pooled funds, which equates to roughly £ Due to the volatility of gilt prices and yields, these estimates will not reflect the current position, and the rise in gilt yields in 2022 will have reduced the total amount of hedging. 11. The UK corporate bond and fixed rate mortgage markets are around £ trillion, and gilt pricing also underlies a broader set of markets beyond these. 12. The Bank’s recent CCP Supervisory Stress Test used reverse stress testing to look well beyond historical precedent. 13. The Bank and the FCA have sent Dear CEO letters to firms following the default of Archegos and conducted a supervisory review of global equity finance businesses. This requires relevant firms to carry out a systematic review of the business strategy and organisation and financial risk management controls and governance. And the Bank put out a consultation on supervisory expectations for contingent leverage within banks’ ICAAP assessments and new requirements of its reporting. 14. TPR regulates pension schemes; the FCA regulates LDI managers. 15. See Building Financial Market Resilience: From diagnosis to prescription – speech by Jon Hall 16. This progress has been led by the FSB, with the involvement of international standard setting bodies. The FSB has set out its analysis  of non-bank risks and a programme of work last year and is due to report on next steps soon.
Such a self-reinforcing price spiral would have resulted in even more severely disrupted gilt market functioning. And that would in turn have led to an excessive and sudden tightening of financing conditions for households and businesses. In response to this threat, the Bank of England intervened on financial stability grounds. But what led to that intervention? The root cause is simple – and indeed is one we have seen in other contexts too – poorly managed leverage. So today I’ll set out how leverage outside the banking sector can create risks to financial stability, starting with that small corner of the pensions market. And then I’ll set out what needs to be done - by participants, by their regulators and by financial stability authorities - if we are to ensure those risks to financial stability are reduced. How did a small corner of the pensions industry threaten financial stability? Many UK DB pension schemes have been in deficit, meaning their liabilities – their commitments to pay out to pensioners in the future – exceed the assets they hold. DB pension schemes invest in long-term bonds to hedge the interest rate and inflation risk that arises from these long-term liabilities. But that doesn’t help them to close their deficit. To do that, they invest in ‘growth assets’, such as equities, to get extra return to grow the value of their assets. An LDI strategy delivers this, using leveraged gilt funds to allow schemes both to maintain material hedges and to invest in growth assets.