At least three LDI managers request emergency capital as others consider unwinds to avoid default.

UK pension funds have been hit with variation margin calls of as much as £100 million ($107 million) each, after sharp falls in gilts and sterling pushed mark-to-market valuations on derivatives and leveraged repo positions heavily against them.

Simeon Willis, chief investment officer of consultancy XPS Pensions Group, says he knows of three different fund managers running pooled pension portfolios that have requested emergency capital from clients to keep positions open.

“Unless clients happen to have a large amount of capital with those managers, that will lead to some temporary closing out,” says Willis, adding: “The markets are moving more quickly than the timescales to transfer liquid assets from one place to another. So, the teams that don’t have instantaneous access to liquid assets in a large liquidity pool are starting to get hit with this.”

Pension funds face large margin calls on the interest rate derivatives and asset swaps they use for asset-liability hedging. Some are also being asked to post additional collateral against leveraged gilt repo positions, as well as foreign exchange derivatives used to hedge US dollar assets. With 10-year UK government bond yields surging 96 basis points between September 22 and 26, and the sterling/US dollar spot rate falling around 14% over those dates, the mark-to-market values of these positions have all moved against the funds. Those moves were triggered by the unveiling of the new UK government’s so-called mini-budget on September 23, when markets were spooked by commitments to simultaneously cut taxes and increase spending. Dilesh Shah, head of liability-driven investment (LDI) at Aon, says pensions that invest in pooled portfolios typically have as long as a week to meet margin calls. But given the speed of the market moves and the demand for margin this week, LDI managers “are now saying we need the money today or tomorrow”.

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