BlackRock Urges Stress Tests in FSOC Query of Asset Managers

BlackRock Inc. endorsed stress tests of mutual funds and reiterated its view that individual asset managers don’t pose a risk to the financial system.

Stress tests of mutual and private funds would help ensure “robust portfolio liquidity risk management,” New York-based BlackRock, the world’s largest asset manager, told the Financial Stability Oversight Council in a summary of a letter released Thursday. The FSOC, a group of regulators led by Treasury Secretary Jacob J. Lew, had asked the industry for input on how to judge whether asset managers’ activities could threaten the financial system.

The council has been grappling for years with how to increase scrutiny of the largest U.S. fund managers. It previously considered whether to designate any of them as systemically important non-banks, which would have subjected the firms to Federal Reserve oversight.

Under pressure from the industry and Congress, the FSOC last year decided to focus on activities and products.

In January, Fed Governor Daniel Tarullo said asset managers could pose potential risks in a future crisis if they are forced into fire sales, and said new regulations might be warranted to promote stability.

The FSOC’s request for comment didn’t fully take into account regulations implemented since the 2008 credit crisis that have made the financial system safer and more resilient, Barbara Novick, vice chairman at BlackRock, said in an interview.

Broader View

Officials shouldn’t look at asset management “too narrowly,” Novick said. For example, if regulators want to tighten rules for the lending of securities, “it’s not an asset-management issue. It’s a securities lending activity issue.”

Stress tests gauge the ability of financial firms to ride out periods of turmoil by using hypothetical scenarios such as a deep recession.

BlackRock repeated its view that asset managers “do not pose systemic risk” and have a “fundamentally different” business model than banks that use capital and deposits to finance lending.

Pacific Investment Management Co., which runs the world’s biggest mutual fund for bonds, said in a separate letter that the FSOC should defer to the Securities and Exchange Commission, the primary regulator for asset managers.

SEC Chair Mary Jo White said last year her agency will propose five new regulations for asset managers, including new standards for liquidity management, the use of derivatives and stress testing. White is one of 10 voting members on the FSOC.

Fidelity Investments said in a letter that the SEC should “lead this effort” to consider whether mutual funds or other asset-management products pose systemic risk. Fidelity questioned the council’s focus on “hypothetical liquidity risk.”

“The hypothesis that mutual fund liquidity and redemption risks could threaten U.S. financial stability is unsupported by realistic assumptions or empirical data,” Fidelity senior vice president and general counsel Scott Goebel wrote in the letter.

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