Over the past month or so meanwhile, the margin call challenges facing highly leveraged U.K. corporate LDI programs — after the surprise Sept. 23 announcement of an aggressive fiscal stimulus plan sent U.K. rates surging — have prompted a further review by U.S. plan overseers of their LDI arrangements.
In the U.S., "I expect clients and consultants will focus on two areas of change to help protect against issues witnessed in the U.K." — how much leverage plans allow themselves to use and the type of collateral they deploy to offset derivative exposure, said Gene Tannuzzo, Minneapolis-based global head of fixed income at Columbia Threadneedle Investments.
On the question of leverage, U.S. plans for the most part are already on less precarious ground than their U.K. counterparts, market veterans say.
With the three to four times leverage U.K. plans often employ for their LDI plans, "sharp drops in prices can create a liquidity issue, as they're required to post margin very quickly as prices drop," Mr. Tannuzzo said.
For Columbia Threadneedle's LDI clients, by contrast, "we see lower leverage use … most of our U.S. clients do not use any leverage at all," he said. Columbia Threadneedle does not disclose its LDI assets under management.
Meanwhile, the market mechanisms employed by U.S. corporate plans leave them less exposed to disruptive margin calls, asset owners contend.
Some U.S. plans with LDI programs get interest rate exposure via swaps and futures, so they're not immune to getting margin calls on days where interest rates go up, noted Charles Van Vleet, assistant treasurer and chief investment officer of Providence, R.I.-based Textron Inc.'s $7.7 billion DB plan.
"In the U.S., however, swaps are uncleared, which means they can post can (other) collateral instead of cash" and that, on balance, means that U.S. plans are not at risk of a cash squeeze for margin calls, Mr. Van Vleet said in an email. Textron employs an LDI strategy.