I won’t use any more of this speech today to look backwards. For those that do want to dig deeper, I’d like to briefly plug a speech by my colleague Jon Hall, which will cover the risks of leverage including in LDIs next week. What I’d like to do instead is explain what the Financial Policy Committee (FPC) is doing to build steady state resilience in LDI funds and what needs to be done by pension funds to ensure risks to financial stability are reduced. Then I’ll look forwards to how the FPC might use this framework for steady state resilience in LDI funds to build resilience throughout the system of market-based finance[6] in the future. How are we building resilience in LDI funds? As this audience will know, the FPC does not have specific regulatory responsibility for pension schemes or LDI funds. However, the FPC has recommended a framework for steady-state resilience within LDI funds. [7] The FPC recommended that The Pensions Regulator (TPR) specify and enforce minimum levels of resilience for LDI funds, continuing its collaboration with other  Page 3  relevant regulators where necessary. TPR took a first step towards this in April. [8]  What should LDI funds be resilient to? And what form will this resilience take? The FPC wants to ensure that in the future, core markets such as gilt markets can continue operating even while suddenly repricing.
I’ve spent this morning talking about measures to tackle the root cause of the stress last autumn, poorly managed leverage. But LDI funds aren’t the only non-bank to use leverage. [20] And leverage is also not the only vulnerability in the non-bank system. Forced selling that can follow from leverage can also arise from liquidity mismatches[21] or from a lack of preparedness for margin calls. [22] Identifying vulnerabilities is only half the battle. We also need to understand how market participants will behave when a stress hits. To this end, the Bank is very shortly launching its exploratory exercise to enhance understanding of the risks to and from non-banks, their behaviours, and how these behaviours can amplify shocks. As part of this exercise the Bank may reach out to some of you attending this conference. Shining a light on how market participants may behave collectively in a stress will help both the Bank and yourselves better prepare for such events. You’ll hear plenty from us once the exercise is launched. In particular, my colleague Lee Foulger will be giving a speech next week outlining how this exercise will helps us to better understand system-wide resilience. But what should we do about these vulnerabilities? We should seek to contain them and to mitigate their financial stability impact. This is what I’ve laid out today with respect to LDI funds’ leverage. Further frameworks may need to be built up.