(Corrects in ninth paragraph to show report was published in
May, not April)
By Emily Stephenson
WASHINGTON May 29 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,
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)