Liability Driven Investments..

[sarsi]

Because I am panicking. I haven't managed to encourage or scare anyone enough to go read and consider the BOE and hedging on their own independently and any thot on this still stuck on debunking what I said and proving I'm someone who doesnt know shit. We all need more info but ft and Wsj didn't ask so pls just consider sending some emails when free.

[jgl]

Then perhaps panic quietly instead of all over the internet, because it doesn't do anyone else any good. Even if you have a good point to make, conveying it in this fashion just detracts from whatever it is you're trying to say.

It's really hard to take someone seriously if they insist on remaining semi-incoherent via phone messages.

[bdw]

@sarsi, paragraphs would make your posts much, much easier to read.

I was thinking the same, but then actually nah probably not, would still be going right over my head. sarsi seems to be pointing at something big that none of us can see, and is apparently quite dissapointed we are not writing emails to someone about it and talking to our family and friends. If I knew what it was I am suppose to write/talk about then maybe I could consider it.

[sarsi]

Wow seriously.

[hullexile]

Wow seriously.

Yes seriously. You are like a headless chicken. I really want to follow your argument but I am finding it impossible. Partly because of my ignorance but largely because your rants are mostly incoherent

[sarsi]

There is no argument, I am just pleading with ppl to take another closer look at this hedging and BOE incident and not assume it is box standard stuff or believe wholesale that was all there is to it. Just wow that ppl are replying mostly to point out that my behavior is a nuisance

[TheBrit]

There is no argument, I am just pleading with ppl to take another closer look at this hedging and BOE incident and not assume it is box standard stuff or believe wholesale that was all there is to it. Just wow that ppl are replying mostly to point out that my behavior is a nuisance

I’ve looked seriously at it. I spent a few hours reading about it, talking to people in the industry and getting to grips with the basic mechanics of LDI.

I don’t see any cause for concern. What am I missing?

[hullexile]

A friend posted that the £65 billion figure being reported is the maximum and that the BOE has actually only spent £3.66 billion. Correct?

[sarsi]

Normal margin trading for individual eg buy $200k worth of Euro/Usd with only $10k equivalent (avail margin). If price goes down, your position value can only take up to 10k of unrealized losses before margin call. You have post up more or sell down yourself before they close and sell out your position. Max possible loss is $200k

For institutions, you need to place a min amt ($millions cash or equivalent) with your prime broker before any trade and maintain a certain level ongoing. This can also be as eligible collateral you can use for trades. For convenience and just how things are, it is unlikely they are wiring in as required because it takes time to transfer securities to and from other accounts. Also have to pay some transfer fee. So assume fund has more than required amount for trades in the prime brokerage acct. The eligible collateral is also subject to rehypothecation rights by the broker. Quid pro quo, they can use for their own purpose so long as it's there. This makes recovering and separating assets if the broker goes belly up for any reason unrelated to you extremely difficult.

Derivatives margin trading include straightforward ones like interest rates and Forex swaps but not only. We can't tell from the public info atm exactly what it was and won't know for sure unless they tell us. This is just my guess but if it was yields going up that caused it, it could be corresponding price of short term gilts dropping so the avail margin value for a particular trade (details unknown) falling short because the gilts are part of that margin, and triggering the call. So the position value didn't actually suffer any loss, it was just fluctuation in margin value falling short. But with such a big pension fund value, the fund should have been able to funnel and channel additional margin to post up to avoid liquidation or just emergency borrow from BOE if urgent. This doesn't explain why BOE would need to step in to act as buyer in the open market to stem the cascade. I think one possibility is the unrealized position loss on the particular trade is large enough that they didn't have enough eligible collateral left to reshuffle but it is my guess. I also think needing BOE to intervene to buy in the open market means they could not by the trade terms just terminate it and take the loss outright either because cant terminate before the contract expiry date or unrealized loss again too large (tho not necessarily solvency level) that the pension fund managers thought it is ok to keep it going and perhaps roll over at expiry if it is still out of the money by then and hopefully no market movements that could cause them to run out of margin value again.

Pure guesswork again but it could be yield level itself was the bet so maybe the fund executed a yield lock with broker to fix gilt yield for a specified maturity at x% to hedge against any decrease because it has matching liabilities. Tax cuts announced ultimately caused longer term yields to go up so fund position is loss making. Market sells off some longer term gilts because corresponding price dropping so they cash out which pushes up yields even more so more losses. BOE steps in to buy up bulk of longer term gilts in market to support market price. I have the same worry here on why with such a big fund value that they didn't manage to shuffle enough to post. The tax cuts announcement were sorta anticipated not real sudden or unexpected turbulence imo. Also this trade must still be ongoing if that's the case so at risk of market movement.

[sarsi]

All signs I'm seeing indicate the trade positions involved are very high and subject to ongoing market risk. Even if they are profit making, this is a very unhealthy level of risk for pensioners.