Extra margin calls on leveraged funds run for pension schemes are a case often cited when thinking about collateral management, counterparty credit management, and stress test design.

What happened

After the UK government announced a fiscal package with large tax cuts on September 23, 2022, yields on long-dated gilts rose sharply1. Over the four days from September 21, the 30-year gilt yield rose by 140bp (basis points; 1bp is 0.01%)2, more than twice the move during the March 2020 "dash for cash,"3 which had been the largest since 2000.

Many UK defined-benefit pension schemes used liability-driven investment (LDI). LDI funds that managed money for them with leverage faced collateral and margin calls as gilt prices fell and had to sell gilts4. The Bank of England judged that continued dysfunction would be a material risk to UK financial stability and announced temporary purchases of long-dated gilts on September 285.

Item Value
Rise in the 30-year gilt yield (four days from September 21) 140bp
Largest one-day rise in the 30-year yield (previous maximum since 2000: 29bp) Over 35bp, twice
Investment in LDI products in the UK (December 2022) Over GBP 1 trillion
Gilt sales by LDI funds (September 23 to October 14) About GBP 23 billion
Gilt sales by defined-benefit pension schemes (same period) About GBP 14 billion
Margin and collateral calls (same period, Bank staff estimate) Over GBP 70 billion
Total purchases by the Bank of England GBP 19.3 billion

Calls exceeded gilt sales because funds and schemes also sold other assets and used cash on hand67.

How LDI works

A defined-benefit scheme carries its promised future benefits as liabilities. When long-term rates fall, the present value of the liabilities rises, and when rates rise, it falls. Under LDI, a scheme holds long-dated gilts or interest rate swaps so that assets and liabilities move in the same direction as rates change8.

Many UK schemes were in deficit, and LDI funds were also a way to increase gilt exposure through leverage. LDI also made it possible to hold growth assets such as equities to raise returns and narrow the deficit8. Large schemes run LDI themselves or hold segregated accounts with a manager. Smaller schemes use "pooled" funds in which several schemes invest together8.

Leverage comes in two ways. One is for a fund to pledge gilts in a repo and use the cash to buy more gilts. The other is to replicate the rate exposure of holding gilts with an interest rate swap in which the fund receives fixed and pays floating9.

A fund keeps a cushion (buffer) between its assets and liabilities. The yield buffer is how far long-dated gilt yields can rise before the cushion is exhausted, expressed in bp10. The smaller the cushion, the higher the leverage and the more likely a call for extra funds.

SchemeDBLDI fundPooledBankCounterpartyInvestmentFunds callCollateralRepo cashCollateral call
Figure 1LDI funds, pension schemes, and banks (repo case)
Figure description

This figure shows the flows between a pension scheme, an LDI fund that borrows through repo to buy gilts, and a bank. Solid arrows show money or assets moving. Dashed arrows are requests, not transfers: the bank asks the fund for more collateral, and the fund asks the scheme for extra funds. When gilt prices fall, the bank calls for collateral, and the fund in turn asks the scheme for extra funds.

The spiral of margin calls and sales

When rates rise, an LDI fund's net assets fall as gilt prices drop and its leverage rises. Swaps also require margin for the valuation loss. The fund must raise funds from the schemes or sell gilts to bring leverage back4.

Consider a hypothetical example in which a pension scheme invests 10 billion yen in an LDI fund, and the fund borrows 10 billion yen to buy 20 billion yen of long-dated gilts. The scheme's liabilities are worth 20 billion yen and move in proportion to the gilts. Leverage is the gilt value divided by net assets. Interest, fees, and haircuts are ignored.

Case Gilts (billion yen) Borrowing (billion yen) Net assets (billion yen) Scheme liabilities (billion yen) Leverage (x)
Start 20 10 10 20 2.00
Rates rise, gilts fall 10% 18 10 8 18 2.25
Rates fall, gilts rise 10% 22 10 12 22 1.83

When gilts fall 10%, net assets drop to 8 billion yen and leverage rises to 2.25x. Liabilities also fall to 18 billion yen, so the scheme's overall gain and loss offset each other8. To bring leverage back to 2x, the fund must receive 1 billion yen of extra funds from the scheme and repay 1 billion yen of borrowing, or sell 2 billion yen of gilts and repay 2 billion yen of borrowing. When gilts rise 10%, net assets rise to 12 billion yen and leverage falls to about 1.83x. Liabilities also rise to 22 billion yen, so the overall gain and loss again offset each other.

In September 2022, pooled funds in particular faced operational delays in collecting funds from many small schemes, and cash did not arrive quickly. After the purchases began, some pooled funds still waited for cash from schemes, and many of the schemes had to sell assets such as corporate bonds to raise it11.

A fund that could not raise funds in time had to sell gilts in volumes far above normal daily trading into an illiquid market. Selling pushed gilt prices down and long-term yields up. A spiral of falling prices, more calls, and more forced sales threatened to impair market functioning12.

Funding the margin is covered on the Funding Variation and Initial Margin page.

Timeline

Sep 23The UK government announces afiscal package with large tax cutsSep 28The Bank of England startstemporary purchases of long-datedgiltsOct 10Per-auction cap raised from GBP 5billion to GBP 10 billion;collateral widenedOct 11Index-linked gilts added to thepurchasesOct 14Final purchases
Figure 2Timeline and purchases, September 23 to October 14, 2022
Figure description

This timeline lists events from the fiscal announcement to the final purchase, in date order. The start of the purchases (September 28) and the final purchase (October 14) are the milestones, shown with emphasis. The spacing between events is not proportional to the number of days.

From September 28, UK financial regulators monitored how LDI managers were raising funds. The main managers asked schemes for more capital so that they could cut leverage without selling gilts. The timing varied by fund, and pooled funds were expected to take longer than schemes with segregated accounts13.

Managers expected any sales to be large, to be concentrated in the smaller index-linked gilt market (gilts whose coupons and redemption payment are linked to a price index14), and to peak in the week of October 1013. On October 10, the 30-year real yield (the yield excluding price inflation15) rose about 60bp and the 30-year nominal yield about 30bp in a day16.

The Bank of England's response

The Bank of England's temporary gilt purchases aimed to restore orderly market conditions. The Bank bought on whatever scale was necessary, HM Treasury indemnified it, and the purchases were limited to October 145. On the day the purchases were announced, the Financial Policy Committee (FPC) assessed the risk to financial stability and recommended action5. The purchases were not meant to stop gilt prices from adjusting to changes in fiscal policy17.

The purchases were priced as a backstop so that they would not interfere with price discovery or substitute for market participants managing their own risk18. For index-linked gilts, the Bank set a minimum yield and did not buy at real yields below the close on October 1016.

The collateral expansion of October 10 temporarily widened the collateral accepted in the Bank's regular lending facilities to corporate bonds rated BBB- (Baa3) or above, helping banks lend to LDI funds19. Index-linked gilts were added to the purchases because, in that market, LDI funds' selling demand exceeded the market's capacity19.

Total purchases were GBP 19.3 billion: GBP 12.1 billion of conventional gilts and GBP 7.2 billion of index-linked gilts7. Most of the purchases were from LDI managers. On October 17, the Bank said the operations had ended and that LDI funds' resilience had risen significantly20.

Weaknesses the authorities identified

In its December 2022 Financial Stability Report, the FPC said the speed and scale of the September moves far exceeded historical moves and fell outside the assumptions of risk management and regulatory stress tests. It then listed shortfalls in LDI funds' resilience21.

  • Buffers were small and less usable than expected. Many funds and schemes had not adjusted their cushions to changes in gilt yields through the year.
  • Funds' internal stress tests did not capture extreme gilt market moves or other participants moving in the same direction.
  • Firms' operational arrangements, and in some cases schemes' governance processes, hindered the replenishment of buffers. Some custodian banks relying on manual processing could not keep up with the volume and complexity of requests.
  • Banks did not fully understand whether LDI funds could meet calls under stress.
  • Data on the sector were lacking, and the regulatory regime was complex and fragmented.

The FSB report lists the policy gaps in the September episode: weaknesses in banks' and LDI managers' risk management and operations, insufficient margin and collateral levels, no disclosure of concentrated positions, and no concentration or wrong-way risk add-ons23. As an example, haircuts on bilateral gilt repos were close to zero, far below the initial margin that clearing houses demand on interest rate swaps, which let LDI funds raise leverage24. Repos are covered on the Repos and Securities Lending (GMRA, GMSLA) page.

What changed afterward

The Bank of England does not directly regulate pension schemes, LDI managers, or LDI funds. Schemes and managers are regulated by TPR (The Pensions Regulator) and the Financial Conduct Authority (FCA), and the bank counterparties of LDI funds by the Prudential Regulation Authority (PRA). LDI funds are typically based outside the UK25. The response was therefore coordinated among authorities in the UK, Ireland, and Luxembourg26.

Date Event
November 10, 2022 The Bank of England confirms it will sell the gilts in a timely but orderly way27
November 29, 2022 Sales begin through windows that respond to buyers' requests27
November 30, 2022 The FPC recommends that TPR act to maintain resilience28
November 30, 2022 TPR, the Central Bank of Ireland, and the CSSF issue statements, and the FCA welcomes them29
December 13, 2022 The Bank publishes the Financial Stability Report setting out the reasons28
January 12, 2023 The Bank announces that the sales are complete27
March 29, 2023 The FPC recommends that TPR set minimum resilience levels for LDI funds30
April 24, 2023 TPR publishes guidance for trustees31
April 29, 2024 The Central Bank of Ireland sets minimum levels for sterling LDI funds32

The recommendation of November 30, 2022 was an interim measure. Sterling LDI funds in Europe had built an average yield buffer of 300 to 400bp, and the recommendation asked for that level to be maintained. The FPC said permanent minimum levels should follow28. In its statement the same day, the FCA asked market participants to widen the range of extreme but plausible events in their risk management, because liquidity buffers are necessary but only a partial solution and events can exceed them29.

In March 2023, the FPC set the minimum at a level able to withstand a rise in yields of at least about 250bp. In the Bank staff's calibration, 250bp has two parts. One is about 80bp as a baseline for each fund's own risks. The other is about 170bp to withstand a market-wide shock like September's without forced selling. Both assume five-day moves and that schemes can deliver collateral within five days. The level is maintained in normal times and can be drawn down in stress30.

In its April 2023 guidance, TPR split the cushion in two: an operational buffer for day-to-day moves and a market stress buffer of at least 250bp. The two add up. For example, an operational buffer of 100bp gives a total of 350bp. The 250bp assumes funds can be replenished within five days, and a larger buffer is appropriate if it takes longer31.

On April 29, 2024, the Central Bank of Ireland announced measures requiring Irish-authorised sterling LDI funds to withstand a 300bp rise in UK yields32. Ireland and Luxembourg also set similar requirements, and the UK took additional measures for defined-benefit schemes33.

The FPC also asked banks that fund LDI funds to lend prudently, taking account of regulators' resilience standards and market dynamics under stress34.

Notes

  1. Bank of Japan Financial System and Bank Examination Department, "企業年金の運用戦略からみた金融安定への含意 ―英国債市場の混乱からの教訓―" (Implications for financial stability from corporate pension investment strategies: lessons from the turmoil in the UK gilt market) (external site), BOJ Review 2023-J-2 (January 2023), (in Japanese), page 1, introduction and Chart 1 (announcement on September 23). The English title is our own translation. ↩

  2. UK Debt Management Office, "Glossary" (external site), "Basis point (bp)". ↩

  3. Bank of England, "Financial Stability Report - December 2022" (external site) (December 13, 2022), section 5.2. ↩

  4. Financial Stability Report - December 2022 (external site), section 5.2 ("Leveraged LDI funds came under particular pressure"). ↩ ↩2

  5. Bank of England, "Bank of England announces gilt market operation" (external site) (September 28, 2022). ↩ ↩2 ↩3

  6. Financial Stability Report - December 2022 (external site), sections 5.1 and 5.2. The calls figure is a lower-bound estimate that depends on data coverage (footnote 14 of the report). ↩

  7. Bank of England, "Letter from the Governor of the Bank of England to the Chancellor of the Exchequer" (external site) (January 16, 2023), page 1 and footnote 1 (GBP 12.1 billion and GBP 7.2 billion). ↩ ↩2

  8. Financial Stability Report - December 2022 (external site), section 5.1. ↩ ↩2 ↩3 ↩4

  9. Financial Stability Report - December 2022 (external site), section 5.1 ("LDI funds generate leverage either through repo borrowing or via derivatives"). ↩

  10. Financial Stability Report - December 2022 (external site), section 5.1 (buffer) and section 5.4 (footnote 15, definition of the yield buffer). ↩

  11. Financial Stability Report - December 2022 (external site), section 5.2 (the delays at pooled funds, and many schemes selling corporate bonds or other assets after the purchases began) and section 5.1. ↩

  12. Financial Stability Report - December 2022 (external site), section 5.2 ("vicious spiral of falling prices, collateral calls and further forced gilt sales"). ↩

  13. Bank of England, "Letter from the Deputy Governor for Financial Stability to the Chair of the Treasury Committee" (external site) (October 18, 2022), page 2 ("Background to the Bank's additional measures"). ↩ ↩2

  14. UK Debt Management Office, "Glossary" (external site), "Index-linked gilts". ↩

  15. Bank of England, "Yield curves - terminology and concepts" (external site), "Real spot and forward rates". ↩

  16. The same letter (external site), page 4 (minimum yield) and page 6 (yield moves on October 10). ↩ ↩2

  17. The same letter (external site), page 8. ↩

  18. Financial Stability Report - December 2022 (external site), section 5.2 ("the Bank acted as a backstop purchaser"). ↩

  19. Financial Stability Report - December 2022 (external site), section 5.2 (the TECRF, index-linked gilts from October 11). The collateral rating is on page 3 of the Bank of England's letter of October 18, 2022 (external site). ↩ ↩2

  20. Bank of England, "Letter from the Deputy Governor for Financial Stability to the Chair of the Treasury Committee" (external site) (October 18, 2022), page 7 (announcement on October 17) and page 8 (most purchases were from LDI managers). ↩

  21. Financial Stability Report - December 2022 (external site), section 5.3. ↩

  22. The Pensions Regulator, "Using leveraged liability-driven investment" (external site), "Maintaining the buffer" (the time a sale takes, and managers typically expecting calls to be met within five working days). ↩

  23. Financial Stability Board, "Leverage in Nonbank Financial Intermediation: Final report" (external site) (July 9, 2025), "September 2022, LDI crisis" (section 2.2, pages 7–8). ↩

  24. The FSB report (external site), section 2.2 (pages 7–8, near-zero haircuts) and footnote 16 (page 9). ↩

  25. Bank of England, "Financial Policy Summary and Record - October 2022" (external site) (October 12, 2022), "UK economic and financial market developments". ↩

  26. The FSB report (external site), section 4.5 (page 29). ↩

  27. Bank of England, "Letter from the Governor of the Bank of England to the Chancellor of the Exchequer" (external site) (January 16, 2023), page 1. ↩ ↩2 ↩3

  28. Financial Stability Report - December 2022 (external site), section 5.4 (recommendation 22/Q4/1 and footnote 15 on the yield buffer). ↩ ↩2 ↩3

  29. Financial Conduct Authority, "Statement on Liability Driven Investment (LDI)" (external site) (November 30, 2022). ↩ ↩2

  30. Bank of England, "Bank staff paper: LDI minimum resilience - recommendation and explainer" (external site) (March 29, 2023), the "FPC assessment" and "Bank staff's assessment" sections. ↩ ↩2

  31. The Pensions Regulator, "Using leveraged liability-driven investment" (external site) (April 24, 2023), "Collateral resilience". ↩ ↩2

  32. Central Bank of Ireland, "The Central Bank introduces macroprudential measures for Irish-authorised GBP-denominated LDI funds" (external site) (May 3, 2024). ↩ ↩2

  33. The FSB report (external site), section 2.2 (page 8). ↩

  34. Financial Stability Report - December 2022 (external site), section 5.4. ↩