CSSF communication on macroprudential measures for GBP denominated Liability Driven Investment funds

On 23 November 2023, the CSSF launched a public consultation outlining a proposal, following coordination with the Central Bank of Ireland, to introduce macroprudential measures by imposing a minimum yield buffer on GBP denominated Liability Driven Investment funds (“GBP LDI funds”) via the use of Article 25 of the Alternative Investment Fund Managers’ Directive on the use of information by competent authorities, supervisory cooperation and limits to leverage, as implemented into Luxembourg legislation by Article 23 of the Law of 12 July 2013 on Alternative Investment Fund Managers.

Building on the feedback received from the consultation, the CSSF publishes today the final set of macroprudential measures whose objective is to ensure the continuing resilience of GBP LDI funds managed by Luxembourg Alternative Investment Funds Managers (“LU AIFMs”) by codifying the existing yield buffer and, on that basis, reducing the probability that such funds will contribute to future crises. The main aspects of the final rules include:

  • GBP LDI funds must maintain resilience to a minimum of 300 bps increase in UK yields before their NAV turns negative.
  • The yield buffer applies to all GBP LDI funds managed by LU AIFMs.
  • All exposures of the funds are to be considered in the yield buffer’s calculation, subject to the buffer composition and liquidity criteria set out in the final rules.
  • GBP LDI funds are required to calculate their monthly average yield buffer at the end of each month. The monthly average yield buffer must be reported as a single observation to the CSSF following each month-end and should be greater than or equal to 300 bps.
  • To provide limited flexibility, one of the last four monthly reporting observations can be below 300 bps in exceptional circumstances. The use of this flexibility will be monitored, with the expectation that it will not be used on a regular basis.

Following the end of the three-month implementation period on 29 July 2024, the CSSF industry letter of November 2022 will no longer be applicable. In this letter, the CSSF outlined its expectation that GBP LDI funds were expected generally to maintain the enhanced level of resilience observed at that time, which was resilience to a 300-400 basis point increase in yields.

LU AIFMs must ensure that existing GBP LDI funds they manage comply with the proposed measures by 29 July 2024 at the latest. New GBP LDI funds managed by LU AIFMs are expected to be compliant from inception. The CSSF will contact the relevant LU AIFMs bilaterally to provide more detailed information on the reporting changes.

All relevant documentation, such as the final CSSF policy framework for GBP LDI funds managed by LU AIFMs which also includes the CSSF feedback statement on the public consultation, the consultation paper as well as the feedback received from stakeholders, is available to the public on the CSSF website.