Posted by Dave on

Liability Driven Investments

Liability Driven Investments

Why do the pension funds have to post collateral on their LDI portfolios?


  1. Liability driven investments by Investopedia
  2. Leverage in LDI, a wonderful-servant, a-terrible-master by NN Investment Partners
  3. Collateral Fundamentals by icmagroup, dated 7 11 2012, a ,pdf


From Collateral Fundamentals, “OTC derivatives trades start from a position of zero value, but over time mark-to-market value will accumulate to one of the parties. Collateral is used to mitigate that party’s risk (i.e. counterparty credit exposure).” and …

• Mark-to-markets is actioned periodically (preferably daily)
• As profits and losses on the derivative contract change, the collateral must be increased/decreased accordingly
• Whilst two way credit support is preferable there are agreements where collateral is only required on a one way basis (eg if B owes A and not vice versa) Collateral: OTC derivatives

Common OTC derivatives are: Interest Rate Swaps (IRSs), Forward Rate Agreements (FRAs), equity
derivatives and bond derivatives

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