Written evidence from Columbia Threadneedle Investments (LDI0086)

We would like to make the following general points about client monitoring of leverage and resilience before describing the specific datasets we provide:

-          In line with current regulatory expectations and market practice, we have reduced leverage thresholds across our LDI products to provide clients with more resilience. The reporting we provide anchors around these parameters. It therefore helps inform client decision making around the implementation of appropriate collateral waterfalls and governance models to sit alongside LDI allocations

-          We manage multi-client pooled funds and segregated accounts. Whilst the leverage resilience principles are the same, the reporting we provide for each differs slightly to reflect the unique structural features of each approach.

-          Various European regulators, including the UK Pensions Regulator, have made it clear that portfolio resilience should not advertently fall below 300bps without prior notification to the relevant regulator. This is defined as 300bps to full asset exhaustion. In practice, it is important that we/clients are equipped with information that would help inform action before the point of full asset exhaustion. Our current reporting arrangements reflect this.

Pooled fund clients – reporting provided

-          All funds are included in a weekly scenario analysis report issued to clients and/or their investment consultants where they have requested this. The report illustrates the market move required to trigger up to 10 successive capital calls, and the aggregate amount of cash that would be required at each call:

• The monetary call amount is defined per £1m invested, allowing clients to easily tailor the data to their own investments.
• The report also shows the market move required to hit our stop loss threshold (the point where hedging would be reduced immediately without any further rebalancing calls being made).
• It also shows the total resilience to full asset exhaustion as per the 300bp rule.

-          A weekly leverage report issued to clients and/or their investment consultants where they have requested this. It shows the leverage levels of all funds and the market move required to hit both re-leveraging and de-leveraging thresholds as well as the stop-loss point. This report includes key market level charts and a summary of upcoming leverage rebalancing events:

• It also shows the £ amount per £1m invested that would be called or paid in each instance.
• Resilience to total asset exhaustion is also presented.

-          A quarterly client specific report which reflects the unique blend of funds (LDI funds and adjacent in-house assets we manage) held by an individual client and shows the sequence of potential rebalancing events:

• The data illustrates the market move required to trigger each rebalancing event and the cash amount that would be required to support each event.
• It also states the £ amount a client would need to hold in adjacent assets to provide excess resilience of x% This is a more conservative measure than resilience to full asset exhaustion.
• This can be compared to a valuation of non-LDI in-house assets at the bottom of the report to allow an at-a-glance assessment of overall resilience.

Segregated clients – datasets provided

Segregated clients also include portfolios run within a bespoke fund set up for the exclusive use of a single client within our LDI fund:

-          Our monthly portfolio report issued to each client presents the level of leverage at month end, along with the headroom to each of the pre-defined leverage rebalancing triggers.

The report includes a time series chart to illustrate the progression of portfolio leverage over time. The bespoke nature of these portfolios means that clients can add to the portfolio as desired, at the point a trigger is hit. We do not therefore specify a £ amount when communicating to a client that a trigger has been hit, but we will engage with the client directly where they want guidance as to an appropriate course of action.

-          We additionally monitor all portfolios daily against the 300bp rule, with this data being available to clients as required.

The above summarises the data we currently provide to clients. It is subject to change as we are constantly looking to evolve and improve our offering in response to the changing regulatory landscape and client and adviser feedback.

March 2023