Liability Driven Investments..

[TheBrit]

You say all of this is just your guess. But you don’t need to guess, and your guesses are wrong. The reason they struggled to raise collateral is all bids for gilts disappeared in the immediate panic over the Governments budget.

You can’t post cash if you can’t sell your gilts.

The BoE stepped in as a buyer in the short term to restore the market to their usual function…

Again, don’t confuse liquidity and solvency. Cash and assets are not the same thing and turning assets into cash is usually easy but not when the market is dysfunctional, like when they’re spooked by a UK government with reckless fiscal plans.

[TheBrit]

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?

The 65bn figure was a maximum of 5bn a day over a couple of weeks. They haven’t spent the maximum per day either.

[sarsi]

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.

[sarsi]

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.

[TheBrit]

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.

Gilt prices dropping isn't the issue.

When gilt prices drop the value of the gilts in the fund go down
When gilt prices drop the value of the liabilities of the fund go down.

Same same but opposite if gilt prices rise.

The assets and liabilities fall or rise in tandem.

This is the really key point you simply don't seem to understand.

On your other point, the fact they couldn't raise cash was because they couldn't sell gilts in short term market panic/volatility. That's it. You might like to say this didn't happen but you are directly contradicting every single report on what actually did happen.

DB pension funds can negate this risk in future by holding more cash as standard, they can fix this by using other assets like equities as collateral or a source for funding, they can fix this by streamlining operational procedures (apparently some operations needed wet ink physical signatures which held the whole process up). I'm sure a lot of them are making these sorts of changes now.

[sarsi]

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.

[TheBrit]

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

NO NO NO NO.

If you have $200 and you have pay $50 tomorrow and $50 the day after would you say your fund value is (approx) $100?
If you have $150 today and you have to pay $25 tomorrow and $25 the day after would you say your fund value is (approx) $100?

But your assets have dropped by $50 !!!!

[sarsi]

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.

[TheBrit]

What does assets moving in tandem with liabilities have to do with what I'm saying.

OK, I'm out.

[sarsi]

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.