Financial Stability Workshop - Leverage, liquidity and concentration: Vulnerabilities of GBP Liability-driven investment (LDI) funds through the prism of regulatory data

Abstract

We assess risks related to funds pursuing Liability-Driven Investment strategies by merging entity and activity-level regulatory datasets. The analysis points to high concentration risks stemming from large holdings of UK sovereign bonds and a high degree of portfolio overlap among funds. We also document the use of leverage sourced from interest rate derivatives and repo borrowing. We perform a liquidity stress test by estimating liquidity demands following a large interest rate shock. Funds would not have enough cash to meet margin calls and collateral demands but they could mobilise unpledged bonds to raise liquidity. Our work illustrates how liquidity stress testing can be performed using EMIR data.