The DESK - Fixed Income Trading

The Fed and BlackRock's bond-buying criteria challenged

Written by Dan Barnes | Apr 28, 2020 7:33:16 AM

Detail around the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) launched by the Federal Reserve Bank of New York’s (FRBNY, ‘The Fed’) has been requested by nine senators.

Trading for the facilities is being run via asset manager BlackRock, while portfolio management is driven by the Fed, with the US Treasury and the US taxpayer being the end investors, having equity investment in the facilities. They will operate by purchasing securities, including some high yield corporate bonds and exchange traded funds (ETF), until 31 December 2020.

Three main questions around execution have been raised by market participants to The DESK: Who will manage the broker list? How will execution quality be judged? How will conflicts of interest be avoided by BlackRock’s Financial Markets Advisory team, when it might buy assets including BlackRock ETFs, or assets it has a view on for investment purposes?

A spokesperson for BlackRock said, “We aren’t able to discuss the Fed mandate.”

Members of the United States Senate Committee on Banking, Housing, and Urban Affairs have written to the chair of the Fed, Jerome Powell, to explain how the how FRBNY’s third-party investment manager, BlackRock Financial Markets Advisory, will make purchasing decisions.

“There will likely be a high demand for these facilities, but the Fed’s funding is finite,” they wrote. “It will be important for policymakers, taxpayers, and the market to understand how FRBNY will direct BlackRock to allocate those resources.”

Additional detail has been requested around the preliminary term sheets for the facilities, which suggest a broad strategy of providing access to any investment grade US company with financing needs.

“However, recent reports have indicated that the Trump administration may pursue targeted relief for specific industries with financial weaknesses that are only partially attributable to the COVID-19 pandemic,” the senators wrote. “To assuage concerns that the Fed’s facilities will be used to support specific industries, the Fed should publish the full details of any investment guidelines FRBNY provides to BlackRock. That should include the Fed’s rationale for the guidelines, as well as any future changes or additions to the guidelines.”

The committee members also requested insight into the facilities’ transactions, including disclosing the identity of all issuers, the terms of any financing provided, and the intended use of the funds.

“The Dodd-Frank Act requires the Fed to release quarterly details of its Section 13(3) lending facilities’ open market transactions, and the CARES Act requires the Fed to provide weekly transaction disclosures and monthly reports to Congress,” they wrote, observing that the Fed also has the authority to report this information in a “timely manner" to serve the public interest.

“Considering the substantial investment of taxpayer dollars as a first-loss buffer for the facilities and the clear congressional intent of the importance of transparency reflected in the CARES Act, the Fed should disclose these transaction-specific details on a monthly basis, if not more frequently,” they said.

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