To address concerns, the contract calls for the New York Fed to make almost all of the buying decisions, with BlackRock executing trades -- removing it from having to pick “winners” and “losers” in the debt markets. State Street Bank will be the custodian of the assets.
“BlackRock is acting as a fiduciary to the Federal Reserve Bank of New York,” the firm said in a written statement. “As such, BlackRock will execute this mandate at the sole discretion of the bank, and in accordance with their detailed investment guidelines, in order to provide broad support to credit markets and achieve the government’s objective of supporting access to credit for U.S. employers and supporting the American economy.”
‘Ethical Wall’
The document also outlines an “ethical wall” segregating the BlackRock team managing the government-bond operations from personnel throughout the rest of the firm’s trading, brokerage and sales operations. Staffers working on BlackRock’s Fed-backed program won’t be allowed to provide investment advice to anyone but the special-purpose vehicle created by the Fed, known as Corporate Credit Facilities LLC.
BlackRock will run the government’s bond-buying program through its Financial Management Advisory Group, which is separate from its other investment and advisory services. With some 250 employees, the group already operates under a material non-public-information-barrier policy restricting communications with other parts of the firm. It’s not clear how many people in the group will be allocated to the Fed program.
“There are stringent information barriers in place between BlackRock Financial Markets Advisory and the firm’s investment business,” the firm said. “These information barriers are well-established, having been in place for over a decade and repeatedly audited and reviewed by clients, competitors, regulators and BlackRock control functions.”
Confidential information about the government program will be shared internally on a “need to know” basis and will be shared with other parts of the firm only under certain controlled procedures, according to the contract. Employees who transition out of the Fed bond-buying program into other parts of the firm are required to go through a two-week “cooling off” period.
In addition to not collecting management fees for ETFs in the portfolio, BlackRock has also agreed to rebate to the Fed the ETF management fees it receives on any of its ETFs that are purchased for the program.
Under its contract, BlackRock is required to disclose potential conflicts of interest to the New York Fed and is prohibited from trading securities with other portfolios under its control. It also can’t subcontract duties to other firms without consent, and it’s prohibited from lending securities in the portfolio, which will make it more difficult for short-sellers to bet against the assets. The firm’s liability is limited, provided it acts in good faith.
The deal also bestows wide-ranging authority to the New York Fed, allowing it to appoint and remove investment managers, hire additional managers and examine records.
This article was provided by Bloomberg News.