"A lot of these perhaps don't have the financial acumen to really understand what is happening here. Also, when it's overlaid with derivatives, if you're buying a product like that, you need to have the governance decision-making in place to move very quickly when markets move incredibly fast," Mr. Rathi added. Some of these funds, he said, had terms in place that allowed for cash to be called in 10 days — which doesn't work in an environment such as Sept. 28, when there was an intraday movement in gilt yields of 127 basis points.
Mr. Rathi also said some money managers are "doing some soul-searching now as to whether that is a product that they think is going to be available in the way it has been historically, going into the future."
Questioned on the extent to which the FCA oversees investment strategies used by money managers, Mr. Rathi said that, while the FCA generally will not micromanage investment strategies, an important point around the level of protection provided to different investors is relevant.
He explained that, typically, pension funds, as institutional investors, are treated as professionals — so they have access to advice and resources to make investment decisions — and the FCA has not put in place retail-style investor protection measures.
"Saying that, what we have seen … from this experience is that where a number of investment managers are offering a particular investment strategy, they need to make sure they have understanding of the operational issues that may arise both in terms of their intermediates they're using and indeed their customers," Mr. Rathi said.
Expanding on his comment about "soul-searching" on the part of some investment managers, Mr. Rathi said, "notwithstanding that these may have been professional investors, it's not obvious that they had the financial acumen to manage some of the products that were ultimately sold to them." While strategy documents all said investors could lose 100% of their money, "the question is, did they understand what would actually happen? And I think that's something that we are all reflecting on," he added.
Speaking at the same session, Charles Counsell, CEO of The Pensions Regulator, said about 60% of defined benefit plans have invested in LDI in some way. He stressed that the strategy has led to an improvement in funding levels and that LDI helped pension funds to get through the global financial crisis and the COVID-19 pandemic.