BlackRock sets the record straight
19 May 2015 New York
Image: Shutterstock
Policy makers have misunderstood securities lending practices and associated risks, according to a whitepaper from BlackRock.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have “unfortunately” formed the foundation of recent policy discussions.
“We believe it is imperative for policy makers to have all the facts,” said BlackRock.
BlackRock confirmed that it has never had its indemnification agreements triggered or had to use its own capital to repurchase a security on a lending client’s behalf and, as a result, holds $2 billion in unencumbered liquidity against potential indemnification exposure, with access to an additional $6 billion of liquidity.
It is also currently rated “A1” and “AA-” by Moody’s and Standard & Poor’s, respectively, which is among the highest in the asset management industry, and equal to or higher than other major securities lending agents.
The amount of securities loans that BlackRock indemnifies grew significantly between 2012 and 2014.
The increase observed by various commentators reflects a major organisational change during this time period, according to BlackRock.
As part of the terms governing the acquisition of BGI by BlackRock, Barclays was contractually obligated to continue providing counterparty default indemnification to certain BlackRock securities lending clients through 1 December 2012.
BlackRock assumed these indemnification obligations prior to or upon the expiration of Barclays’s indemnification obligation.
In the whitepaper, BlackRock stated “As disclosed in our 10-K, the amount of securities on loan in BlackRock’s securities lending [programme] subject to indemnification as of [31 December 2014] was $145.7 billion.”
Borrowers posted $155.8 billion as collateral for indemnified securities on loan at December 2014. The fair value of these indemnifications was not material at 31 December 2014.
These misunderstandings are centred around potential conflicts of interest, leverage, collateralisation of loans, use of cash collateral and cash reinvestment vehicles, the use of non-cash collateral and rehypothecation, and borrower default indemnification.
In addition, BlackRock claimed that there are many misunderstandings specific to its own involvement with securities lending, and these have “unfortunately” formed the foundation of recent policy discussions.
“We believe it is imperative for policy makers to have all the facts,” said BlackRock.
BlackRock confirmed that it has never had its indemnification agreements triggered or had to use its own capital to repurchase a security on a lending client’s behalf and, as a result, holds $2 billion in unencumbered liquidity against potential indemnification exposure, with access to an additional $6 billion of liquidity.
It is also currently rated “A1” and “AA-” by Moody’s and Standard & Poor’s, respectively, which is among the highest in the asset management industry, and equal to or higher than other major securities lending agents.
The amount of securities loans that BlackRock indemnifies grew significantly between 2012 and 2014.
The increase observed by various commentators reflects a major organisational change during this time period, according to BlackRock.
As part of the terms governing the acquisition of BGI by BlackRock, Barclays was contractually obligated to continue providing counterparty default indemnification to certain BlackRock securities lending clients through 1 December 2012.
BlackRock assumed these indemnification obligations prior to or upon the expiration of Barclays’s indemnification obligation.
In the whitepaper, BlackRock stated “As disclosed in our 10-K, the amount of securities on loan in BlackRock’s securities lending [programme] subject to indemnification as of [31 December 2014] was $145.7 billion.”
Borrowers posted $155.8 billion as collateral for indemnified securities on loan at December 2014. The fair value of these indemnifications was not material at 31 December 2014.
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