BlackRock has defended industry securities lending practices in a recently published whitepaper, and have deemed arguments from regulators as ‘misunderstood’.
In the paper, which was published on Wednesday, the world’s largest money market fund manager says regulators have formed policy discussions based on these ‘misunderstandings’ and have overstated the risks associated with securities lending.
These risks include potential conflicts of interest, leverage, collateralisation, use of cash collateral, rehypothecation and cash reinvestment vehicles.
“We believe it is imperative for policy makers to have all the facts,” BlackRock said in the paper.
BlackRock cited an academic paper published in December 2014 by Nicola Cetrorelli, an assistant vice president in the Financial Intermediation Function at the Federal Reserve Bank of New York, as an example of how regulators have misunderstood securities lending practices.
Furthermore, in the paper BlackRock defends its own approach to securities lending and how it safeguards against potential risk.
“Securities lending agents may hold liquidity on their balance sheet to cover a potential loss… BlackRock holds $2 billion in unencumbered liquidity against potential indemnification exposure to which it is subject and has access to an additional $6 billion in liquidity.”
Regulators, such as the New York Federal Reserve and the Financial Stability Board (FSB), are attempting to crack-down on so-called ‘shadow banking markets’ such as repo and securities lending, and hope to extend distinctions on Systemically Important Financial Institutions (SIFI) to include the largest asset managers.
The FSB plans to finalise a regulatory framework for haircuts on securities financing transactions by the end of the year.