Framework

In order to strengthen the steady-state resilience of Irish authorised GBP-denominated liability driven investment (LDI) funds, the Central Bank of Ireland is codifying, and in certain cases augmenting, the yield buffer supervisory expectation set out in the November 2022 letter to industry. The macroprudential framework for Irish authorised GBP-denominated LDI funds outlines the details of this codification, which followed a public consultation on the main elements of the framework.

The macroprudential framework for Irish authorised GBP-denominated LDI funds specifies that Irish authorised GBP-denominated LDI funds must maintain resilience to a minimum of 300 bps increase in UK yields. The Central Bank’s objective in codifying the yield buffer is to safeguard the resilience of GBP-denominated LDI funds such that they do not amplify stress in the gilt market as they did over September-October 2022.

LDI funds posed a systemic risk to financial stability owing to their excessive use of leverage that forced them to sell gilts following the increase in yields created by UK government’s ‘mini-budget’ announcement. The volume of gilts that GBP denominated LDI funds were forced to sell drove gilt prices down further, creating a downward spiral for the gilt market. The yield buffer aims to prevent such a situation reoccurring by restricting the amount of leverage that GBP-denominated LDI funds can employ.

Reflecting the macroprudential objective of the measures, the measures will apply to Alternative Investment Fund Managers (“AIFMs”) of Alternative Investment Funds (“AIFs”) that are domiciled in Ireland, authorised under domestic legislation. The Central Bank will also apply the measures to Irish authorised AIFs with non-Irish AIFMs under the relevant domestic funds legislation.

The Central Bank will provide a three-month implementation period for existing funds as of 29^th of April. It is expected that GBP-denominated LDI funds authorised after the 29^th of April will adhere to the yield buffer limit from inception.