CORRECTED-BlackRock rejects U.S. concerns on securities lending agreements

Thu May 29, 2014 7:38pm EDT

(Corrects in ninth paragraph to show report was published in May, not April)

By Emily Stephenson

WASHINGTON May 29 (Reuters) - BlackRock pushed back on Thursday against a U.S. report that raised concerns about asset managers and securities lending, arguing in a paper sent to regulators that its activities do not pose outsized risks.

At issue are transactions in which entities lend stocks and bonds in exchange for cash or other collateral. Mutual funds often lend securities to hedge funds to generate extra income, for example.

Some banks and asset managers such as BlackRock facilitate transactions for clients. They sometimes agree to compensate clients if a borrower fails to return a security that has become more valuable than the collateral held by the lender.

The Financial Stability Oversight Council (FSOC), a group of regulators that keeps tabs on emerging risks, said in a report this month that these indemnification agreements could be risky for asset managers, which do not face the same capital and liquidity requirements as banks.

BlackRock's response, which was seen by Reuters, said its clients must hold more than enough collateral and that the firm has sufficient liquidity to meet indemnification needs.

"Borrower default indemnification is an established practice in securities lending, provided by the majority of lending agents to a variety of their clients," BlackRock said.

Treasury Department spokeswoman Suzanne Elio declined to comment on the BlackRock paper. The Treasury Department houses the risk council.

The risk council can tighten regulations on nonbank financial firms it views as especially risky, and asset managers want to avoid this.

The council's annual report, published in May, did not name any firms. It listed securities lending indemnification among trends it said could be problematic, such as banks selling mortgage servicing rights to nonbank firms.

Barbara Novick, a BlackRock vice chairman, said in an interview that the report did not discuss asset managers' efforts to ensure clients hold enough collateral.

She also said the report overstated the risks because the agreements only kick in when a borrower defaults, and asset managers only pay the difference between the value of the security and the collateral. (Reporting by Emily Stephenson; Editing by David Gregorio)

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