The LDI (Liability-driven Investment) Debacle, Derivatives and Systemic Risk: There You Go Again!

This article examines the role of derivatives in the context of the recent crisis in the UK pension system, specifically in liability-driven investment schemes. It unveils derivatives’ role as instruments that multiply and propagate losses among market participants once specific events (worst-case scenarios) materialise. This article questions the role of derivatives as risk-management and risk-diversification tools, given their employment, in this case as in others before, for speculative purposes. Critically, with speculation came higher than desirable levels of leverage that these financial products elicited, causing in the process a series of systemic concerns. While much criticism has been directed at post-2008 regulation, and particularly at clearing and margin requirements, this article proposes a broader view of the problems posed by derivatives in the different contexts of their applications. More specifically, attention is drawn to legal doctrines that could be redeployed for the purpose of mitigating the speculative nature of derivatives.