CP157 – Macroprudential measures for GBP liability driven investment funds

The Central Bank launched a consultation, proposing to codify and enhance the existing yield buffer measure for GBP LDI funds through Article 25 of the AIFMD. This proposal aims to strengthen the steady-state resilience of GBP LDI funds in response to vulnerabilities highlighted during the 2022 UK government bond market crisis.
To address these vulnerabilities, the Bank of England implemented a temporary intervention in the gilt market, allowing LDI funds more time to reduce their leverage. In November 2022, the Central Bank of Ireland issued an industry letter (please see EventID#18449) outlining supervisory expectations for GBP LDI funds to maintain an improved level of resilience, referred to as a “yield buffer,“ which was set at a 300-400 basis point increase in yields.
This present consultation paper outlines a related proposal. The key elements include maintaining a minimum 300 bps yield buffer equally applied across all Irish authorized GBP denominated LDI funds. Only assets on the fund’s balance sheet are considered components of the yield buffer, and monthly average calculations must be reported to ensure compliance with this requirement.
Additionally, limited flexibility will be provided by allowing one reporting observation below 300 bps over four reporting periods under exceptional circumstances. The purpose is also to improve liquidity resilience and will be accompanied by high-level guidance on liquidity for Irish authorized GBP denominated LDI funds.
Following feedback from stakeholders received during this public consultation process, it is anticipated that final measures will be announced in Q1 2024 with an implementation period of three months thereafter. Compliance adjustments are not expected to be substantial as this proposal mainly codifies existing measures.
The expected incremental cost for Irish authorized GBP denominated LDI funds resulting from implementing these measures is anticipated to be limited. By strengthening their resilience through codifying these measures, the Central Bank aims to reduce future crises in the gilt market and lower leverage in the run-up to such crises. The Central Bank welcomes stakeholders‘ feedback on this consultation paper and invites evidence to support their views until 18 January 2024.