Liability Driven Investment (LDI) Funds

The Central Bank has introduced macroprudential measures to Irish-authorised GBP-denominated liability driven investment (LDI) funds by codifying, and in certain cases augmenting, the yield buffer to safeguard the resilience of these funds such that they do not amplify stress in the gilt market as they did over September-October 2022.

The 2022 UK gilt market crisis highlighted vulnerabilities amongst GBP-denominated LDI strategies that posed a risk to financial stability owing to their excessive use of leverage that forced them to sell gilts following the increase in yields The scale, but especially the pace, of the increase in yields following the UK Government’s ”mini budget announcement” forced GBP-denominated LDI funds to sell gilts at a moment of market illiquidity, driving yields higher and creating a self-reinforcing dynamic. Recognising the systemic risk this posed to the UK’s financial system, the Bank of England undertook a temporary and targeted intervention in the gilt market.

The crisis was particularly acute for funds whose leverage and duration (i.e. the interest rate sensitivity of their portfolio) left them exposed to movements in gilt yields. Higher leverage and higher duration leave funds less resilient to increases in yields.

A significant cohort of GBP-denominated LDI funds are authorised in Ireland. This was reflected during the 2022 gilt market crisis, where Irish-authorised funds accounted for 30 per cent of net gilt sales by LDI funds and their investors.

Recognising the significance of Irish-authorised GBP-denominated LDI funds, the Central Bank outlined, via an industry letter in November 2022, supervisory expectations that GBP LDI funds maintain an improved level of resilience. This was introduced in coordination with the Commission de Surveillance du Secteur Financier (CSSF, Luxembourg’s National Competent Authority), after interaction with the European Securities and Markets Authority (ESMA). GBP-denominated LDI funds were to maintain resilience to a 300-400 bps increase in yields (a ‘yield buffer). The yield buffer, which indicates the maximum increase in yields a fund can withstand before its net asset value goes to zero, incorporates both leverage and duration in its calculation.

In order to make this cohort of funds more resilient to shocks to UK interest rates, the Central Bank of Ireland is codifying and, in certain cases, augmenting the existing yield buffer measure via the use of Article 25 of the Alternative Investment Fund Managers Directive (AIFMD). These measures require that Irish-authorised GBP-denominated LDI funds maintain resilience to a minimum of 300 bps increase in UK yields.

The yield buffer aims to prevent such a situation reoccurring by restricting the amount of leverage that GBP-denominated LDI funds can employ. For GBP LDI funds authorised by the Central Bank of Ireland before 29 April 2024, the policy framework will apply from 29 July 2024, while for any new GBP LDI funds authorised after 29 April 2024, the AIF must comply with the framework immediately.


These measures on Irish authorised GBP-denominated LDI funds are the second macroprudential policy measures to be introduced under the third pillar of the Central Bank’s macroprudential policy framework, which covers non-banks. The Central Bank is particularly focused on ensuring that the overall macroprudential framework continues to evolve and adapt, to respond to the evolution of the financial system itself. One of the most pronounced changes observed in recent years at a global level has been the growth in the non-bank sector, including the investment fund sector. Given that Ireland has one of the largest investment fund sectors in the world, it is a priority for the Central Bank to develop and operationalise the macroprudential framework for the non-bank sector, safeguarding the resilience of this form of financial intermediation.

Research Papers

“Irish-Resident LDI Funds and the 2022 Gilt Market Crisis” Central Bank of Ireland, Financial Stability Note Vol. 2023 No. 7 (PDF).

Measures in Other EU Countries

This measure is being codified in coordination with the CSSF, with whom the Central Bank of Ireland have undertaken an aligned consultation process in CP157 – Macroprudential measures for GBP LDI funds. This builds on the November 2022 industry letter to GBP LDI funds published by the CSSF and Central Bank.

Both the Central Bank of Ireland and the CSSF are introducing the yield buffer as an ‘other restriction’ under Article 25 of AIFMD. Article 25 of the AIFMD provides for the imposition of other restrictions on leverage that AIFMs are entitled to employ with respect to the AIFs they manage, where the use of leverage by those AIFs contributes to systemic risk or disorderly market.