LDI firms update margin stress tests post-gilt crisis

For some managers, stress-testing models failed to reflect the convexity effects of the crisis on initial margin

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Many of the UK’s largest liability-driven investment (LDI) managers are updating stress tests designed to predict the impact of market moves on initial margin and posted collateral. It’s an attempt to address shortcomings in these models that were exposed by the gilt crisis. 

In September 2022, the UK government’s mini budget triggered a spiralling doom loop of falling gilt prices and rising margin calls. Pension funds were forced to sell off long-dated inflation-linked gilts to raise cash to