ChrisNix wrote:dealtn wrote:ChrisNix wrote:dealtn wrote:ChrisNix wrote:
Are you familiar with Eb's schemes' investments?
No. Are you familiar with any schemes that could purchase AA bonds without any up front cash?
I'm not sure why you feel you're adding anything here. In the largest scheme I was involved in we took on targeted interest rate swaps to hedge the cost of bonds we were yet to buy under our funding flight path. We didn't feel the need to label it LDI.
That said, I'd rather like to understand the thinking behind the liability management in
Eb's schemes.
So explain in your scheme how your route targeted hedging the "cost" of bonds, rather than their performance? Did your interest rate swaps have exchanges of capital at front and back, with the amounts adjusted for current and redemption prices. I've certainly written many such swaps - although margining them introduced additional distortions between the underlying bond and hedge performance.
Much of the conversation around why "funds" sought to take a derivative, rather than bond route, has been critical, but few have acknowledged the main issue was the lack of available cash in those funds to actually purchase (or repo fund) those bond positions. Even in hindsight those that criticise are unable to fully explain how any alternative path would have been taken in practice.
What I am "adding" here, is a reality to check, and hopefully educating those less knowledgeable based on my practical experience. If that's inconvenient to you I apologise, but you are not the sole user of this thread.
It's a few years ago, but our funding flightpath assumed the purchase of bonds in the future, based on their
then cost. If rates fell the cost of the bonds would turn out to be more. The swaps would pay out in that circumstance. There was no exchange of capital at the onset, but collateral requirements.
So you were exposed to exactly the same risk that you, and other commentators, are critical of. If interest rates had moved extremely sharply against you in a period of less than a week, you would have faced massive collateral calls on those swaps. Across the industry that might have required emergency liquidity provision by the BoE
ChrisNix wrote:There were plenty of alternative paths to a leveraged bet on interest rates falling. What derivatives did allow, contrary to the clear spirit of the pension regs, was schemes to gain exposure greater than they could afford in cash. On that I think we may actually agree.
Yes, although we might disagree on what you refer to as that "clear spirit". You will struggle to find, at least here, a bigger critic of the pensions industry, the LDI industry, or the UK regulatory environment with respect to pensions.
ChrisNix wrote:
Given QE and slashing of base rates the leverage turned out to be brilliant for schemes in the decade up to the end of 2021, and even the hammering in 2022 has left them well ahead on bond based measures of funding.
Yes, taking into account leverage. Care should be taken though that nominal performance for many strategies has been lower than bond based alternatives given many swaps had capped upsides (and downsides - but that leg proved valueless except in very trivial circumstances).
ChrisNix wrote:Nevertheless, when pension funds are the substantive counterparty to 40% of the interest rate swaps in the UK market, it's pretty obvious things were overdone.
Source please? The Interest rate book I was responsible for at a UK listed clearing bank had a much smaller counterparty exposure to pension funds than that - less than 10% of the long side, less than 5% overall.
ChrisNix wrote:All that said, rather than getting bogged down in your mechanics, I am interested in the actual [i]thinking involved in Eb's schemes! [/i]
Which he can provide and I am not preventing.