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RegulationMay 9, 2023

British Regulators Issue LDI Guidance So ‘Necessary Lessons Are Learned’

The Pensions Regulator and the Financial Conduct Authority aim to prepare LDI investors for future volatility.

The UK’s Financial Conduct Authority and The Pensions Regulator have published guidance for asset managers and pension funds intended to help funds manage risk when using leveraged liability-driven investments.

The guidance comes in response to the September 2022 bond market meltdown, when U.K. financial assets saw severe re-pricing, particularly of long-dated government debt. The spike in yields triggered collateral calls and forced gilt sales that led to market dysfunction for firms with LDI strategies.

The FCA has since been working with other regulators, both in the U.K. and abroad, and has engaged directly with firms involved in managing LDI portfolios to develop and maintain increased resilience to minimize any future volatility.

“We have been closely monitoring asset managers using LDI strategies as they make improvements and the sector is now much more resilient to potential risks, but there is more to be done,” Sarah Pritchard, the FCA’s executive director of markets, said in a release.

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The FCA’s guidance, which follows recommendations from the Bank of England’s Financial Policy Committee, focuses on risk management and operational arrangements for LDI managers. It sets out what the FCA expects in terms of risk management, stress testing, and client communications, “so that the necessary lessons are learned from last September’s extreme events,” Pritchard said.

TPR is reminding trustees that they are responsible for how the assets in their plan are invested, and its guidance stresses the importance of having the right governance and controls in place to reduce risks, and to react quickly to extreme events.

According to TPR, it expects trustees to only invest in leveraged LDI arrangements that have an appropriately sized buffer in place. This must include an operational buffer specific to the LDI arrangement to manage day-to-day changes, in addition to the 250 basis points minimum to provide resilience in times of market stress.

The regulator is also urging trustees to make sure there are processes in place to monitor the resilience of LDI arrangements, taking into account TPR guidance on monitoring pension plan investments.

“The unprecedented market volatility seen last September clearly demonstrated there is the need for stronger buffers, more stringent governance and operational processes and more oversight by trustees,” Louise Davey, TPR’s interim director of regulatory policy, analysis and advice, said in a release. “Trustees must understand the risks they carry in their investment strategy, and only use leveraged LDI if appropriate. Our guidance provides practical steps to ensure they achieve this vital balance, and we expect trustees to use it.”

Florida Pension Sues Fidelity National Over Worldpay Deal

The fintech firm is accused of failing to disclose material information that led to a $17.6 billon write-down.

By Michael Katz

A Florida pension fund has filed a securities class action lawsuit against Fidelity National Information Services Inc. for allegedly failing to disclose material information related to its $43 billion acquisition of payments company Worldpay Inc.

The complaint, filed by the Palm Bay Police and Firefighters Pension Fund, alleges that the acquisition led to a goodwill impairment charge of $17.6 billion that caused the company’s stock to drop sharply.

The lawsuit centers on Jacksonville, Florida-based Fidelity National’s $43 billion acquisition of payments company Worldpay in 2019. With the acquisition, Worldpay became part of Fidelity National’s Merchant Solutions segment. The pension fund alleges that Fidelity National and its executives made false and misleading statements about the Worldpay acquisition by assuring investors it had “successfully completed the Worldpay integration” and touted the benefits for the company of the integration of Worldpay.

“Investors slowly learned that the company’s important Merchant Solutions segment was underperforming and that the company’s integration of Worldpay was not ‘successfully completed,’” the complaint alleges.

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According to the complaint, on August 4, 2022, Fidelity National announced that James Woodall, its chief financial officer, planned to step down three months later, an announcement that allegedly caused the stock to fall more than 7%. The complaint notes that “other management changes soon followed.” The lawsuit adds that on November 3, 2022, Fidelity National reported that its Merchant Solutions segment suffered a “margin contraction of 430 basis points,” which allegedly caused Fidelity National’s stock price to plunge more than 29%.

Finally, before the markets opened on February 13 of this year, Fidelity National announced it would spin off Worldpay and that it would result in a $17.6 billion write-down on the asset, which allegedly caused the stock to drop 12%.

“As a result of defendants’ wrongful acts and misleading statements, and the precipitous decline in the market value of the company’s securities, plaintiff and other class members have suffered significant losses and damages,” the complaint says.

The lawsuit alleges that Woodall, then-CEO Gary Norcross and President Stephanie Ferris knew that adverse facts about the company had “not been disclosed to and were being concealed from the public and that the positive representations being made were then materially false and misleading.”

Representatives from Fidelity National Information Services did not immediately respond to a request for comment.