Written evidence from BlackRock LDI0085

BlackRock1 is pleased to have the opportunity to respond to the Work and Pensions Committee inquiry into DB Pensions and LDI. We are committed to the LDI market and our clients and appreciate that we can help it evolve in a constructive and co-operative way.

BlackRock manages the pension savings of over 11 million people in the UK. Our investment approach is rooted in our fiduciary duty: we start with our client’s objectives, we seek the best risk adjusted returns, and we underpin our work with research, data, and analytics.

Please find detailed answers to the questions you provided below. We will continue to contribute to the thinking of the Committee on this and other topics.

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For each of the questions below, we have segmented our answers between multi-client pooled funds and bespoke client solutions. This is because our multi-client pooled funds have a recapitalisation process whereby, we invest recapitalisation assets the client has with us or reduce exposures for those clients that do not have sufficient recapitalisation assets.

For bespoke client solutions, the control of the raising and transfer of collateral assets into client LDI solutions is the responsibility of each client, which therefore results in a different set of reporting.

1 BlackRock is a leading provider of investment, advisory and risk management solutions, and has been active in the UK for over 50 years. Our purpose is to help more and more people experience financial well-being.

Q.1 How often you are communicating to clients, whether you are systematically communicating to all clients, and at what lag to the actual data.

Multi-client pooled funds

The multi-client pooled funds operated with a recapitalisation process which, once triggered, invests additional assets into the funds to decrease leverage. BlackRock’s process takes place over six business days.

We encourage clients to retain sufficient recapitalisation assets with BlackRock to cover the recapitalisation of their LDI fund holdings and for BlackRock to have authorisation to use these during a fund recapitalisation, although this is at their discretion. This means that in the event of a recapitalisation event, the client is likely to have sufficient assets with BlackRock so that we can process the recapitalisation without any action required by the client or the need to sell interest rate or inflation exposure (predominantly gilts) into the market.

Following a recapitalisation event, where buffers in the funds had been restored to higher levels, clients would need to top-up recapitalisation assets to ensure at least 1x coverage is retained going forward to cover any subsequent recapitalisation.

We share the following regular and ad-hoc reporting with our clients and are also putting in place additional reporting for increased transparency.

(a)     Weekly & Monthly Fund Reporting:

-          A report for the LMF Fund range setting out key metrics of each fund, including the distance (in basis points) to the fund going insolvent and the size of the collateral call (per unit) for a potential recapitalisation event.

-          This information allows clients and consultants to determine how likely a fund is to be recapitalised and how much collateral may be called.

-          This report is prepared on a weekly basis with a two-business day lag (produced on Monday using close of business Thursday data).

-          This report is also circulated for month end dates with a six-business day lag.

(b)    New Monthly Client Specific Reporting:

-          To provide further transparency, we are moving toward communicating the quantum of recapitalisation assets held by the client, relative to the 1x suggested minimum coverage, on a monthly basis, starting from end of March 2023.

-          We aim to use month-end data and distribute within eight business days.

(c)     Post Recapitalisation reporting:

-          Clients are informed once a recapitalisation event occurs on any funds they hold in their portfolio and are provided with details of the collateral call that has taken place.

-          As part of this communication, we would also share updated data of recapitalisation assets held by the client, relative to the 1x suggested minimum coverage to cover any subsequent recapitalisation.

Bespoke client solutions

For our bespoke clients, we are advising that they should provide additional collateral to their LDI solution / collateral waterfall at 275-400bps (depending on their own specific governance processes and liquidity of assets). We are therefore providing notifications to individual clients when their collateral buffers drop below certain thresholds starting at 400bps and then in 25 bps increments, so that clients get regular and timely updates regarding their collateral position.

In such cases, we will be providing the notifications one to two business days after the collateral level reaches the specified points. As collateral buffers fall, we would aim to increase direct communication with the client to understand their plans for providing additional collateral should collateral buffers continue to deteriorate.

Q2 Whether the data you are communicating includes:

A.     The total level of collateral resiliency (split between holdings within the LDI fund and additional holdings with the manager)

B.     The distance in terms of basis points to the next collateral call and how large this is likely to be

C.     Any parameters / thresholds they are using for a red-amber-green system to guide clients

Multi-client pooled funds

The information that will be provided to our multi-client pooled funds will include the following:

• The distance in basis points to a multi-client recapitalisation event being triggered.
• The value of clients’ holding across each multi-client pooled funds.
• The estimated recapitalisation amount required for each multi-client pooled fund proportionate to a client’s holdings.
• The quantum of recapitalisation assets the client already has in their recapitalisation waterfall at BlackRock. In addition to displaying the market value, the data will also show an adjusted market value, reflecting the possibility that assets could decline in value prior to the recapitalisation event being triggered.

Bespoke client solutions

The information that will be provided to our bespoke client solutions will include the following:

• The distance in basis points of total collateral waterfall assets, comprising both LDI mandate assets (typically cash and gilts) and additional mandate assets at BlackRock, provided we have the discretion within our agreement with the client to sell the non-LDI assets. If clients do not have a collateral waterfall with BlackRock, we will show to the total assets held in the LDI mandate.
• We are planning on introducing a red-amber-green indicator where the ranges are illustrated as follows:
• Red – ≤300bps
• Amber – 300bps to 400bps
• Green – ≥400bps
• This notification will illustrate the amount of additional collateral required to restore the buffer to 425bps, 400bps, 375bps, 350bps, 325bps respectively.
• If a client has a collateral waterfall with BlackRock, we are also planning on showing a breakdown between different tiers of collateral as set out in Appendix 1.

Appendix 1 – Collateral Waterfall assets

We tier buffer assets into three broad levels (as set out in the diagram below). Please note, the classifications below all refer to assets where we have discretion within the IMA to use in a collateral waterfall without seeking further instructions from the client.

In terms of improving resilience, we are encouraging clients to diversify the assets in the collateral waterfall, to give them greater flexibility to generate additional eligible collateral when required. This includes diversifying exposure to different underlying markets, as well as the creation of fund structures which may be able to act faster when creating additional collateral (i.e. ETFs). We are also encouraging clients to set up credit repo facilities to provide an extra means to create eligible collateral where required.

March 2023