Officials at the FSB have reiterated their calls for
authorities to monitor indemnifications provided by asset
managers acting as agent lenders.
Setting out a series of final policy recommendations this
week, FSB experts said authorities should "verify and confirm"
asset managers adequately cover potential credit losses from
the indemnification provided to their clients. The specific
recommendation forms part of a wider set of proposals first put
forward in June last year relating to financial stability risks
posed by certain asset management activities.
A handful of large fund houses, including BlackRock, act as
agent lenders offering insurance-like commitments known as
borrower or counterparty indemnifications to their clients,
notably their funds. The indemnity insures against potential
losses when a counterparty defaults or does not return borrowed
securities and the pledged collateral is not sufficient to
cover replacement of the losses.
Agent lender banks are already subject to the Basel capital
requirements for potential losses resulting from
indemnification-related exposures. In contrast, asset managers
that are not affiliated with banks do not face capital
requirements related to their indemnification exposures in any
"Authorities currently lack sufficient information/data on
the agent lender activities to monitor trends and potential
risks to financial stability associated with any
indemnification they provide to lending clients," the regulator
said this week. "When such information/data become available,
authorities should verify and confirm that asset managers that
provide indemnifications adequately cover potential credit
losses from their indemnification."
Legal experts at BlackRock responded to the initial
proposals in September last year, saying they were "supportive
of efforts to collect additional data on borrower default
indemnification provided by all securities lending
However, the firm added that when undertaken along with
sound risk management practices, borrower default
indemnification it is unlikely to result in material losses to
the entity providing the indemnification.
BlackRock added that it was not aware of any asset manager
providing securities lending agent services on assets where
they are not the asset manager. For example, BlackRock only
acts as a lending agent on assets where it also provides asset
In addition, the firm currently requires borrowers to post
collateral between 102% and 112% of the value of the securities
lent and collateral is marked-to-market daily.
Overcollateralization provides a "safety cushion" in the event
a borrower fails to return the borrowed security.
Other policy recommendations put forward by the FSB (there
are 14 in total) include further scrutiny on whether certain
asset classes are suitable for open-ended fund structures,
widening the range of risk management tools available to fund
managers at times of market stress, and potentially
strengthening investor disclosure on liquidity issues. IOSCO
will flesh out many of the recommendations in 2017 and 2018 to
put into practice.
Tim Cameron, managing director and head of
SIFMA’s Asset Management Group said the trade body
will review the final recommendations in detail with its
members. "Upon first glance, we continue to have concerns with
some of the FSB’s recommendations," he told Global
Investor/ISF. "For example, stress testing of open-end funds or
system-wide stress testing is not a viable concept and would
yield no meaningful benefit for systemic risk management, as
noted in our substantive comments to the FSB on its initially