Fed Discloses BlackRock's Fee Structure in Bond-Purchasing Program
March 27 2020 - 5:32PM
Dow Jones News
By Dawn Lim
The Federal Reserve Bank of New York on Friday disclosed new
protections aimed at reducing BlackRock Inc.'s chances of profiting
unfairly from its contract to buy bonds on behalf of the U.S.
government.
Earlier this week, the Fed picked BlackRock's financial markets
advisory arm to run several bond-purchasing programs as part of
wide-ranging interventions to calm markets roiled by the
coronavirus pandemic. The mandate highlighted BlackRock's clout in
Washington and its history working with governments in moments of
crisis but also put scrutiny on whether the firm stands to profit
from unprecedented stress in U.S. markets.
One of the programs BlackRock was tasked with involved running a
vehicle for buying already issued investment-grade bonds. BlackRock
would also be able to buy U.S. investment grade bond
exchange-traded funds, including ETFs of its own.
The arrangement raised some criticisms from rivals and industry
analysts that it would put BlackRock, the largest provider of bond
ETFs, at an advantage.
According to a new disclosure of preliminary terms, BlackRock
won't charge asset management fees on any exchange-traded funds in
the portfolio it runs on behalf of the Fed. The firm will also
credit underlying fees and income the firm earns on any BlackRock
ETFs back to the Fed.
"BlackRock will treat BlackRock-sponsored ETFs on the same
neutral footing as third-party ETFs," according to initial terms of
the agreement for that program. The Fed also said it would develop
clear guidelines alongside BlackRock on the investment mix of the
program.
If BlackRock ETFs account for a bigger chunk of the portfolio's
holdings than BlackRock's concentration in the broader bond ETF
market, the Fed will review the portfolio.
The Fed also disclosed fees on a different mandate in which
BlackRock will purchase agency commercial mortgage-backed
securities secured by multifamily-home mortgages on behalf of the
New York Federal Reserve. The Fed will determine which securities
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are suitable
for purchase.
BlackRock is expected to be paid 0.02% -- $2 for every $10,000
-- on the first $20 billion in assets, 0.0125% -- $1.25 for every
$10,000 -- on the next $30 billion and nothing for additional
assets, according to a final copy of the investment agreement.
When the Fed picked BlackRock during the last financial crisis
to oversee assets once owned by Bear Stearns Cos. and American
International Group Inc. after the two financial institutions
collapsed, it was accused of not being transparent and having a
too-cozy relationship with Wall Street.
After the lessons of the last financial crisis, the agency is
attempting to provide more disclosure this time, said people
familiar with the matter.
Since then, BlackRock has seen explosive growth on the back of
funds that trade on exchanges and mirror markets. The firm's
challenge is how to maintain the trust of the public and manage the
unintended ripple effects of its reach across financial systems as
it continues to grow.
Write to Dawn Lim at dawn.lim@wsj.com
(END) Dow Jones Newswires
March 27, 2020 17:17 ET (21:17 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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