The blame game for the recent market volatility is heating up with the government criticising the Bank of England (BoE) and the Bank slating the city watchdog and pensions regulator.
Yesterday the chancellor Kwasi Kwarteng tried to put the heat on BoE governor, Andrew Bailey, suggesting that any fresh turmoil in the markets would be “a matter for the governor” lining him up to be the scapegoat for any further market volatility.
Bailey has said the Bank’s bond buying operation will end on Friday raising concerns as to how the markets will subsequently react to such a 'cliff edge' situation.
The concern is that despite Bailey urging them to do so, pension funds at the heart of this month’s sell-off in gilts will not have unwound their positions enough by Friday which raises the risk of more market chaos next week and that some so-called liability driven investment (LDI) strategies will fail.
The Bank itself has sought to shift blame for the problems caused by LDIs to the city watchdog, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) claiming they had failed to crack down on these risky investment strategies.
"While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned from this episode, and appropriate levels of resilience ensured," the BoE said on Wednesday.
The BoE pointed out that it does not directly regulate pension schemes, LDI managers, or LDI funds. “Pension schemes and LDI managers are regulated by TPR and the FCA” it noted.
It said “LDI funds themselves are typically based outside the UK” adding it “will work with TPR and the FCA domestically to ensure strengthened standards are put in place.”
FCA chief executive Nikhil Rathi said lessons would be learned: 'What's really important right now is that everybody involved in this situation, the pension funds, the managers, the bank counterparties, really focus on the work they need to do in coming days to ensure there is resilience in the system.”