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.
,,,
...
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.
,,,
