Central Plains Shun Special Report 　　　October 17, 2022

Suffering UK Pension Fund

― The Day the Institutional Investor Crisis Shook the Global Bond Market ―

■ Margin Hell

UK institutional investors fell into crisis. Extra margin calls—so-called margin calls—hell. Funds that could not cover enough margin were forced to sell foreign bonds such as U.S. Treasuries. As a result, the global bond market was thrown into turmoil. Indeed, the problem was no longer confined to the United Kingdom alone. Rather, the global bond market chaos and collapse up to October 14 were largely caused by the predicaments of this UK institutional investor—one could say that is not an overstatement.

However, for participants in the market who normally aim for stable pension management, the words “margin” and especially “margin call” may sound discordant. Yet the UK fund, which adopted FinTech—so to speak, a method called “LDI”—used a strategy that linked to new investment techniques, and as a result it leveraged its positions massively, thereby expanding its liabilities proportionally.

■ What is LDI

LDI stands for “Liability-Driven Investment.” This approach seeks to match the cash flows of guaranteed pension payments with the cash flows of the funds being managed, and it rapidly spread after the Lehman Brothers collapse.

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