The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has issued its advice to the Central Bank of Ireland (CBI) and the Commission de Surveillance du Secteur Financier (CSSF) on investment restrictions for GBP Liability-Driven Investment (LDI) funds to ensure their resilience.

The advice follows the notification from the CBI and the CCSF of their intention to impose an investment restriction on Alternative Investment Fund Managers (AIFMs) established in Ireland and Luxembourg and managing GBP-denominated AIFs pursuing a LDI funding strategy. These funds are typically set up by defined benefits pension schemes that provide guaranteed returns to future pensioners.

The measure consists in requiring GBP LDI funds to be able to resist a rise in GBP yields of at least 300 basis points (so called “yield buffer”).

ESMA’s analysis concludes that the conditions for taking actions under the Alternative Investment Fund Managers Directive (AIFMD) are met and the measures proposed by the CBI and the CSSF are justified and should contribute to improving the resilience EU GBP LDI. ESMA also encourages both regulators to monitor the evolution of the GBP LDI funds and to assess the necessity to recalibrate the yield buffer.

The measure applies from 29 April 2024. GBP LDI funds established on or after this date must comply with the measure immediately while existing GBP LDI funds have a three-month transitional period to comply. The measure is not limited in duration. 

Finally, ESMA also invites other competent authorities of AIFMs managing such funds to adopt similar measures.