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Northern Trust told by UK regulators to improve following pension turmoil

UK regulators have ordered Northern Trust to improve its operating systems after the US custody bank was overwhelmed by the demands of processing margin calls during recent pension fund turmoil, people familiar with the situation told the Financial Times.

Bankers called out Northern Trust’s manual processing systems as a key blockage in the system that made it harder for pension funds to adjust their investment strategies swiftly during the market chaos that followed former UK chancellor Kwasi Kwarteng’s disastrous “mini” Budget on September 23.

UK government bond prices plummeted at record speed following Kwarteng’s announcement of unfunded tax cuts, which forced pension funds to raise cash quickly to meet margin calls on derivatives they held that were linked to government bonds.

Northern Trust was the depository for two of the biggest so-called liability driven investment managers — Insight Investment and Legal & General Investment Management — which set up the derivatives for pension funds.

The US custody giant, which looks after $10.7tn of assets globally, was forced to draft in extra staff from the US to help with the workload as it struggled to cope with the volume of orders, the FT previously reported.

“It’s fair to say Northern Trust were at full capacity and were definitely a bottleneck,” said a banker involved in the LDI margin calls.

Although often overlooked, custody banks provide a vital administrative function for investment funds, safekeeping their assets, settling trades, keeping records and exchanging currencies.

Acting as depositories for funds, the banks are responsible for protecting investors’ interests, providing security for assets and liquidity.

People familiar with the situation told the FT that Northern Trust’s UK regulators were now engaging with the custody bank to force it to improve its processes so that it would be better able to support customers in times of stress.

The Prudential Regulation Authority, the Bank of England arm that regulates lenders, declined to comment.

The Financial Conduct Authority also declined to comment, but a person familiar with its position said that custody and fund services play a “crucial role” in “the safeguarding, servicing, and oversight of assets” and that the FCA was focused on “ensuring these firms . . . fulfil this core purpose”.

“Central to fulfilling this firms need to be operationally resilient, which forms one of our key supervision priorities,” the person added. The FCA wrote to firms in March reminding them of their obligations to ensure their operations were “resilient”.

Northern Trust, which is headquartered in Chicago, declined to comment.

The bank is already being investigated by the FCA as part of its two-year probe into the failings of former star fund manager Neil Woodford’s investment business.

Northern Trust was depository for the £3.7bn Woodford Equity Income fund, which closed in 2019 after Woodford got caught in a liquidity crisis of his own making, sparking the biggest UK investment scandal for a decade.

The FCA has been assessing whether Northern Trust did enough to keep in check the fund’s authorised corporate director, Link, which itself faces a fine of up to £306mn for its role in the fund’s collapse.

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