Like Tree20Likes

Liability Driven Investments..

Closed Thread
Page 4 of 6 FirstFirst 1 2 3 4 5 6 LastLast
  1. #31

    Join Date
    May 2006
    Location
    Pampanga, Philippines
    Posts
    29,762

    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?


  2. #32

    Join Date
    Sep 2022
    Posts
    1,371

    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.

    Last edited by sarsi; 04-10-2022 at 11:08 PM.

  3. #33

    Join Date
    Sep 2022
    Posts
    1,371

    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.


  4. #34

    Join Date
    Sep 2022
    Posts
    1,371

    I am not confusing anything. You keep thinking I am worried the fund is not solvent I am not just get over it. Gilts of what maturity? Short term gilts are as good as cash why would buyers in market be disappearing, at most it would just be cheap. The governing agreement would have contingencies for margin collateral valuation for all types in event of not being able to get marked to market valuation quickly or at all eg v long term securities. Margin collateral doesn't need to be cold hard cash. It can be securities and can be other types of securities not just gilts. You won't get 100% value of it as collateral that's all. And the fund ran out of collateral to post. If another set of market conditions happened again today that resulted in moves just like before and it is of a magnitude that BOE can't cover, what would happen. There are other events in the world that can cause gilt prices to drop.


  5. #35

    Join Date
    Sep 2022
    Posts
    1,371

    The trade positions involved in very high. We all still don't know what trade it is at the heart of this that required them to raise collateral but the amount involved is high enough that evidently a pension fund can run out of eligible collateral to post. Eligible collateral that cold hard cash, short term gilts, longer term securities of all currencies can qualify as to some value and the fund ran out of this to post because no buyers willing to buy? Then the gilt market should have been a complete flatline for that period, not a crashing one. Or the fund ran out of eligible collateral to post because only cash was acceptable and no buyer willing to buy them for traditional cash which BOE always has stored in their backshed because this is magic cash that doesn't need to be invested to offset inflation.


  6. #36

    Join Date
    Sep 2022
    Posts
    1,371

    So the market sell-off, who were the rest of the sellers in the markets selling to if there were no buyers

    Gilt yields go up so gilt prices go down. You're still on the LDI strategy and fitting them to how numbers on a financial statement go. Whatever that set off the margin call can happen again. Whatever gets fire sale-d or liquidated for a position value is fund value lost. This is risk level unsuitable for pensioners and I am just asking ppl to think about this and hopefully send some pressure to the decision makers who think this is manageable risk.


  7. #37

    Join Date
    Sep 2022
    Posts
    1,371

    I don't know how your example fits here. Funds hold assets that yield income (like gilts) and are paying out liabilities to pensioners based on that income level. Did the fund get a margin call? Yes. Would they have to liquidate their position value if BOE didn't stop in. Yes. What does assets moving in tandem with liabilities have to do with what I'm saying.

    Letting the fund negate any risk by allowing more margin to be posted to avoid same situation happening is a bad idea pls do not think this is a market risk they can manage. There were many fund investors who could not recover full value of their investments and posted collateral when funds ran into trouble because of rehypothecation.


  8. #38

    Join Date
    Sep 2022
    Posts
    1,371

    Why have you completely sidestepped and ignored the market risk tied to a margin call? If BOE didn't step or stepping in wasn't enough to stem the cascade, would that position that the fund is holding be liquidated because of the margin call? That is a yes isn't it? Are ppl at least agreeing on this.


  9. #39

    Join Date
    Oct 2021
    Posts
    637
    Quote Originally Posted by Sith:
    Just a few facts:
    A pension fund is usually either managed by (multiple) asset managers or if they are big enough they will have their own investment arm.
    The asset manager is only allowed to invest in securities that are stipulated in the agreement with the client (this includes derivatives, hedging, margin etc...)
    Securities are always held with a custodian.
    And pension funds (at least in the west) have very strict reporting rules to the regulator.
    Here is another fact:

    Pension funds lost a lot of money thanks to subprime assets in 2008.

  10. #40

    Join Date
    Sep 2022
    Posts
    1,371

    The fund managers will do their best to manage the risk but it will never be 100%. DeletedUser thinks this is box standard risk under LDI and no need to overworry about one off freak market movements. Apparently there are 10-20 other ppl who share his views and currently running your pension fund. I think different and seriously begging ppl not to let them do more of this with your money. The risk is not as remote as it sounds, it happened in 2008, every now and then for the random fund and it just happened last week.

    Perfectly healthy and solvent funds have gone under in hours because they could not find liquidity quick enough to absorb market movements. When they firesale assets under margin call, these are sold in big amounts asap to then highest avail bidders. Traders and normal investors make their own guesses to try and profit from the market and when they see block sales like that, they might guess there is a margin call on a position. Gilts that are known to be held mostly by pension funds? Maybe it's a good time to short the pound because I think it'll drop soon. It is market risk they cannot manage no matter what they do.