Legal risk management during market volatility – how can the buy-side prepare?

The conflict in Iran and the consequent uncertainty in energy markets is requiring private capital managers, institutional asset managers and pension schemes to review their risk-management arrangements. This includes reviewing derivatives and repo exposures and the scheme or fund's ability to meet collateral calls with cash and gilts. In our view, the legal and governance aspects of these reviews can and should be conducted now, to ensure managers and trustees can react quickly to implement investment and hedging decisions during a potentially lengthy period of market volatility.

Since the war began, we have seen gilt yields reaching their highest levels since the 2008 financial crisis. On 27 February 2026, the day before the airstrikes began, the yield on a UK 10-year gilt stood at 4.23%, and a 30-year gilt at 5.02%. By the end of April, those had risen to 5% and 5.7% respectively, although there have been some sharp spikes and falls in the interim period. Whilst the medium to long-term impact of the war remains to be seen, asset managers and pension schemes will be preparing for the likelihood of further volatility in the short to medium term. The impact on inflation and interest rates, as well as sharp changes in currency markets, can lead to leveraged positions quickly increasing in magnitude, as we have seen during other recent global events such as the outbreak of the conflict in Ukraine in March 2022 and political events in the UK such as the Liz Truss "mini-budget" in September 2022. So far the Bank of England has kept interest rates on hold while it assesses the inflationary damage, although future rate rises are not ruled out.

While some of the risk to LDI funds has been mitigated both by reduction in positions[1] and by compliance with the regulatory buffers introduced by the Pensions Regulator and the FCA in 2023 the UK's heavy reliance on natural gas and the resultant expectation both of rising inflation and consequent interest rate hikes is continuing to drive gilt yields upwards.

In our view, this is an opportune moment for private capital managers, institutional asset managers and pension scheme trustees to consider the legal arrangements supporting their risk management strategies. This could include, by way of example:

·       For private capital managers, considering the legal structure of currency and other hedging arrangements within fund and portfolio company structures to minimise the need to post regulatory variation margin.

·       For institutional asset managers, ensuring all derivatives and repo documentation is appropriate and up to date, including any related collateral and custody arrangements.

·       For pension scheme trustees, reviewing the need for employer liquidity lines and/or bank repo facilities to facilitate access to cash in the event of collateral calls, and clarifying lines of responsibility with investment managers to ensure that risk management decisions can be made quickly and avoid delays in asset sales.

·       For LDI managers, conducting stress tests for a range of market scenarios on LDI strategies, monitoring the sufficiency of regulatory buffers and ongoing hedging and collateral requirements and documenting the policies and arrangements for replenishing the market stress buffer.

Acting now to ensure appropriate arrangements are in place could avoid the need for decision-making in a stressed scenario and address some of the issues that exacerbated earlier market shocks. We have cultivated strong relationships with leading commercial advisers, banks and other financial institutions active in the derivatives and repo markets. This enables us to establish the legal frameworks for your hedging and collateral arrangements swiftly and cost-effectively in line with regulatory developments. Our deep market experience means we understand what matters most to managers and trustees and what financial institutions are willing to accept.

We would be very happy to advise on the legal arrangements supporting the readiness of your fund, scheme or business to navigate the current market uncertainty.