Outlook overview

In less than three days in September 2022, 30-year U.K. Gilt yields rose more than 1.60 percent. For U.K. Defined Benefit (DB) pension schemes, the size and unprecedented speed of this increase created a perfect storm – since these schemes typically manage their liquidity based on bond yields rising by one percent over a period of a week or more.

“The magnitude of this market move went well beyond the contingency plans that most institutions had in place,” says Eileen Herlihy, global head of Sales for Trading Services at J.P. Morgan. “They had to quickly generate appropriate collateral to meet sizable margin calls on interest rate swap and FX forward positions.”

For pension funds and other buy-side institutions, there are important lessons from these unusual events. Their contingency plans had to be rapidly altered when markets shifted in unexpected ways. To weather future storms, institutions will want to maximize their collateral flexibility by having the fullest possible range of assets available and mobilizing, allocating and optimizing those assets quickly and effectively.

“This particular market event highlighted certain stress points that could occur again. For pension funds and other buy-side institutions, it’s worth exploring other strategies to unlock assets for use as collateral, mobilize them more quickly and improve the ability to optimize resources against obligations.”

What caused the U.K. gilt crisis?

For context, the intraday range of 127 bps on the 30-year Gilt in just one day exceeded the annual range for 30-year Gilts in all but four of the last 27 years. Fund managers typically hold large pools of Gilts to meet their obligations on non-cleared trades. They also are required to post cash as variation margin (VM) on cleared trades – this collateral payment is meant to address changes in an asset’s value as the market moves during the trade.

The size of the U.K. DB liabilities versus the total size of the U.K. Gilt market is significant (£1.4 trillion versus £2.1 trillion respectively) and when managers began selling their liability-driven investments (LDI) and Gilts to raise cash, it perpetuated a vicious cycle of falling prices. Ultimately, we saw the Bank of England step in and buy Gilts to stabilize the price, finally stemming the negative feedback loop.

What are LDIs and why do they matter?

LDI is an important investment strategy for DB pension schemes. They’re used to help meet future pension obligations by helping to match the pension scheme’s assets to its liabilities. It is typically used to protect DB schemes from adverse movements in interest rates and inflation and to reduce the impact on funding levels when interest rates fall.

A 100 bps increase over a single day, or a single week, had not been experienced in 10-year sterling swap rates for as far back as 1990. Increases that occur over a longer term would give firms enough time to take mitigating actions.

As Gilt yields moved higher at the end of September, pension schemes needed to act quickly to fund large margin calls. Many reported liquidating significant amounts of money market funds to post cash to collateralize their cleared and bilateral derivatives positions. Once the Bank of England stepped in and markets retreated, the schemes received a significant proportion of that VM back and were required to reinvest it.

“While the market conditions were specific to the U.K., we are seeing a shift in interest globally as clients re-examine their approach to collateral and funding more holistically,” says Ben Challice, global head of J.P. Morgan Trading Services.

Three strategies to unlock collateral


The need to generate appropriate, eligible collateral forced some clients to liquidate equity or fixed income assets in September. Using an agency financing solution, clients could access a pool of counterparties for deep and diversified liquidity, even in times of market stress. J.P. Morgan’s Agency Securities Finance platform enables clients to generate cash from their equity and credit portfolios, in addition to accessing sovereign debt repo. “While we see the greatest interest in using corporate bonds or equities such as S&P, Euro Stoxx and FTSE, we are looking to broaden options for fixed income repo,” Challice says. 


The U.K. Gilt crisis underscored the shortfalls that could challenge a fund managers’ ability to post variation margin. This could have been avoided by creating a more efficient process for initial margin (IM) – the percentage of a security’s purchase price that must be paid in cash or equities – which would increase the pool of eligible collateral to be used as VM.

An outsourced collateral management solution can mitigate operational complexity to allow clients to seamlessly post a broader range of assets as IM. J.P. Morgan’s asset mobilization offering, Collateral Transport, can help clients optimize between the securities they post as collateral and the securities they make available in their securities lending programs. Collateral Transport assists buy-side institutions with securities inventory management across their custody and collateral locations. Optimization occurs daily, helping clients go beyond minimizing counterparty risk to use their collateral resources efficiently.


During the September 2022 market events, pension funds may have had significant offsetting margin calls between their rates and inflation trades. Accelerated collateral settlement timeframes could have helped to reduce the impact of volatile markets and time pressures of meeting margin calls. “As the collateral industry considers how best to utilize blockchain technology, we believe that the instantaneous transfer of ownership, that blockchain facilitates, to be particularly relevant,” Challice says.

J.P. Morgan is working with clients and industry participants to develop use cases for this technology, including developing the proprietary Tokenized Collateral Network (TCN), an application that will leverage J.P. Morgan’s Blockchain network, Onyx Digital Assets.

According to Challice, one use case that may have proven useful during the U.K. Gilt crisis would have been the tokenization of money market funds (MMFs). Traditionally MMFs have not been used as collateral due to the difficulties of transferring them. However, in tokenized form, they could be used to meet VM calls quickly and at scale. J.P. Morgan successfully proved out this use case in May 2022, tokenizing and transferring MMF units between two J.P. Morgan entities using its Onyx blockchain. 

“Given the significant potential benefits, we are working closely with the industry to create tokenized MMFs from a range of fund managers and enlarge the pool of sell side counterparties that will accept them as VM.”


Contact us

For more information about these services, contact your J.P. Morgan Representative.