CSSF communication on GBP Liability Driven Investment Funds consultation

The CSSF is seeking public input on a proposal to introduce macroprudential measures for GBP denominated LDI funds. This would be done through the use of Article 25 of the AIFMD, which covers information usage by competent authorities and limits on leverage.
The need for these measures was highlighted during the gilt market crisis in September 2022, which exposed vulnerabilities in GBP LDI strategies that could pose risks to financial stability. The rapid increase in yields following a budget announcement forced GBP LDI funds to sell gilts during a period of illiquidity, driving yields even higher. To address this issue, the Bank of England intervened temporarily in the gilt market.
In November 2022, the CSSF issued an industry letter outlining its supervisory expectations for GBP LDI funds based on coordination with Ireland’s National Competent Authority and interaction with ESMA. The letter emphasized maintaining an improved level of resilience by implementing a yield buffer that accounts for a 300-400 basis point increase in yields.
The consultation paper proposes codifying this yield buffer measure using Article 25 of AIFMD into Luxembourg legislation implemented by Article 23 of the Law on Alternative Investment Fund Managers. The policy proposal aims to strengthen the steady-state resilience of GBP LDI funds managed by LU AIFMs.
Key elements include maintaining a minimum yield buffer requirement of 300 bps for all GBP LDI funds managed by LU AIFMs and considering all exposures when calculating the yield buffer. Monthly average calculations are required to be reported to CSSF and should exceed or equal 300 bps. To allow limited flexibility, one out of four reporting observations can fall below 300 bps under exceptional circumstances but regular use is discouraged.
After reviewing feedback received from stakeholders, the CSSF plans to publish a feedback statement or announcement of final measures in Q1 2024. A three-month implementation period is proposed following the announcement. Compliance with these measures is not expected to require significant adjustments for GBP LDI funds managed by LU AIFMs.
The CSSF invites stakeholders to provide comments on this consultation paper by submitting feedback before 18 January 2024 via emailto opc_prud_risk@cssf.lu using the CSSF’s response form.