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Article: The ‘missing link’ in today’s interest rate derivatives markets for LDI strategies

27 April 2016 | David Bullen

By David Bullen & Gavin Dixon

Interest rate (IR) markets have changed substantially since the financial crisis, both visibly and also less obviously in their market structure. These differences challenge asset management firms attempting to operate on behalf of their clients, especially in liability-driven investing (LDI), where the rules and market are continuing to change around them.  The risk management requirements of liability-driven investments challenge asset managers who turn to banks for solutions and liquidity in their desire to transfer risk on behalf of their clients. 

New factors that have yet to impact fully, such as the greater flexibility surrounding pensions, prompting elevated transfer-out requests, increases the appetite for LDI fund flexibility. However, this desire for flexibility is at odds with reduced market liquidity and the structural changes that will make flexibility more costly. The reduced market liquidity is largely a result of a reduction in bank balance sheet levels deployed

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