https://www.coppolacomment.com/2022/09/what-was-real-reason-for-bank-of.html ... So when the long gilt market froze, DB pension funds couldn't raise enough cash to meet their margin calls. There was a real risk that they would default on them. This could trigger immediate liquidation of the collateral and unwinding of the swaps. When swaps unwind because of missed margin calls, losses due to collateral insufficiency rebound to the counterparties - and the losses can be substantial. Who were these counterparties? Well, they weren't LDI managers such as Blackrock. Those are just intermediaries. Some of them might have failed - or shut their doors, as Blackrock did - but that wouldn't have bothered the Bank of England. And nor would DB pension funds suffering mark-to-market losses on long gilts. That's a problem for their sponsoring corporations and perhaps the pensions regulator, not the Bank of England. Yet the Bank of England was clearly worried enough to intervene directly in the long gilt market. It acted as buyer of last resort for long gilts, signalling that it would buy £65bn worth of the things over the next couple of weeks. This injected liquidity into the market, enabling pension funds to raise the cash they needed. It also incidentally set a floor under the long gilt price, limiting the damage to pension fund balance sheets. But the Bank's action wasn't fundamentallly about ensuring the solvency of pension funds. It was intended to head off the threat of a systemic meltdown. ,,,
Care to explain how pension funds get margin calls? I hope not a single pension fund fiddles around with any margined investments. But then why do I act surprised...
Click the link, it has a longer explanation. It boils down to those funds holding illiquid assets that can't be liquidated at a moment's notice to cover losses on certain derivatives.
Not that I know anything about this, but I do remember the LME, London Metal Exchange, esssentially stopped trading on a short squeeze, and even reversed trades, all so that the rich Chinese owners wouldn't suffer losses on the metal I can't remember. So to be honest, I don't think there would have been any defaults. We are dealing with highly rigged markets, and before any major player went down, trading would have just stopped. Its of course nice to bring in a buyer of last resort to make it seem like things are more fair than they are, but I'm still sure that something else would have been done even if the BOE didn't start buying gilts.
That's why you employ people that work in liquidity management. If a pension fund is so leveraged/invested in illiquid assets that it cant even pay out its investors on time then something has seriously gone very badly wrong.
A liquidity issue?? OK. But they have a much bigger problem, like why are they in a MARGIN ACCOUNT ? The pension fund is using leverage. I have a pension account (401k). It's at BAC/Merrill. Cash account is type 0 Margin account is type 1 Assets on margin (acc. type 1) are hypothecated (loaned as collateral). That's where margin liquidation happens - account type 1. I used to be Ser. 7 long time ago. My retirement account is type 0 only. No margin agreements allowed on retirement accounts. I thought that was a SEC rule. Others registered folks please comment if that has changed.
I thought without leverage they couldn't get the return they needed - so they had to use leverage. When bonds and stocks went down in tandem their models didn't account for that. I would also be surprised if this is a UK only phaenomenon.
When they use leverage on illiquid instruments and it comes close to margin call, then it just means that their modelling is wrong. They reached now a level which must be far of their models. So with a little extension on standard deviation it could cause a run because of this type of illiquid instruments. That will cause something like a spike and then it reverses after some pension funds went bust. It does not look good at all if they come such close to margin call. They must be damn much wrong.