Liability Driven Investment (LDI) Strategies

System and Operation Challenges

Last autumn’s sharp moves in LDI portfolios resulted in many pension funds being pressured financially and operationally.  Several key issues were identified as needing attention by LDI managers. We summarise these below.

Collateral & Margin Management

There was a clear need to validate and agree on collateral and margin calls in a timely fashion in fast moving markets. Systems and staff that provided accurate valuations that could validate these calls were vital. Integration with the front office positions would be advantageous.

Real Time Data

This is key to analysing your portfolios in a front office system in a fast-moving market. It gives the ability to anticipate collateral and margin calls that will be made the next day, ensuring enough cash is in reserve. It also means that portfolio managers are analysing their portfolios on live positions when these positions could have moved significantly from the previous day’s closing levels.

Stress and Scenario Tests

The Financial Conduct Authority (FCA) has recommended that LDI managers demonstrate the ability to stress, and scenario test their portfolios. They must show that they can stress test a 250-basis point move in Gilt yields and design scenario tests for different market events.  This requires that LDI portfolios are looked at in one system – this covers Over-the-Counter (OTC) Derivatives, which include Interest rate and Inflation swaps, Total Return Swaps, and equity index options, as well as Gilts. The system must be sophisticated enough to allow a shock and different scenarios to be applied to the whole LDI portfolio with the resultant asset and liability moves and collateral and margin calls.


Volumes in LDI pooled funds and the underlying LDI portfolios spiked in the autumn of last year. The LDI manager must have a timely and accurate record of these transactions in their front office systems. The front office system should reflect these in a real time manner. The LDI manager’s fund accountant must reflect these transactions promptly and accurately. This ensures that the re-hedging of portfolios is carried out based on the correct data.

Estimating Liabilities

In asset liability matching and ensuring the asset side is accurately represented, the LDI manager must ensure large moves in interest rates, and inflation is accounted for on the liability side.  Suppose the cash flows from the liabilities are in the same system as the assets. In that case, updated interest rates and inflation forecasts can be easily used to generate up to date values of what those liabilities are worth today.  The portfolio manager can then make the correct adjustments to the asset side, including hedges.

Potential Future Exposures

One of the major challenges last autumn for LDI managers were meeting cash and collateral calls, that is, having enough cash available to meet those calls.   A system that can calculate the potential future exposure to banks and clearing houses on OTC derivatives and bond futures can help ensure enough cash is set aside for different time buckets.


LDI managers have the opportunity to review their systems and operational process to ensure they can meet any future large market moves. Sionic, a Davies company, is experienced in working with LDI managers to ensure these challenges can be met. We would be pleased to share our experiences with LDI managers on how we have tackled these.

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I’ve developed policies, led teams in market data, index and portfolio construction, equity derivatives strategy, and research and trading.