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March 25, 2015 Financial Stability Oversight Council

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March 25, 2015 Financial Stability Oversight Council March 25, 2015 Submitted via electronic filing: www.regulations.gov Financial Stability Oversight Council Attention: Patrick Pinschmidt, Deputy Assistant Secretary 1500 Pennsylvania Avenue, NW Washington, DC 20220 Re: Notice Seeking Comment on Asset Management Products and Activities (FSOC 2014-0001) Dear Financial Stability Oversight Council: BlackRock, Inc. (together with its affiliates, “BlackRock”)1 appreciates the opportunity to respond to the Financial Stability Oversight Council (“Council”) Notice Seeking Comment on Asset Management Products and Activities (“Request for Comment”). BlackRock supports efforts to promote resilient and transparent financial markets, which are in the best interests of all market participants. We are encouraged by the Council’s focus on assessing asset management products and activities, particularly given our view that asset managers do not present systemic risk at the company level, and focusing on individual entities will not address the products and activities that could pose risk to the system as a whole. We have been actively engaged in the dialogue around many of the issues raised in the Request for Comment. We have written extensively on many of these issues (see the list of our relevant publications in Appendix A). Our papers seek to provide information to policy makers and other interested parties about asset management issues. In aggregate, these papers provide background information and data on a variety of topics, such as exchange traded funds (“ETFs”), securities lending, fund structures, and liquidity risk management. In these papers, we also provide recommendations for improving the financial ecosystem for all market participants. All of these papers are available on our website (http://www.blackrock.com/corporate/en-us/news-and- insights/public-policy). Regulators and asset managers have a common interest in protecting asset owners, including pension funds, insurers, official institutions, banks, and individuals from the damaging effects of systemic events. Regulators are charged with protecting investors, not only from systemic risks but also from unsafe or unsound financial services practices. Asset managers are charged, as fiduciaries, with helping their clients (the asset owners) navigate the financial markets to achieve their investment goals. By recognizing these mandates, the Council, regulators, and asset managers can work together to minimize systemic risks while at the same time enabling asset owners to achieve their long-term investing goals. BlackRock is eager to assist in these efforts, and we look forward to working with the Council, the various regulators, and our asset management peers to continue to evolve asset management products and activities in ways that help our clients achieve their goals. While we are supportive of the Council’s focus on products and activities, we would like to emphasize that in order to truly address risks to U.S. financial system stability, the Council 1 BlackRock is one of the world’s leading asset management firms, managing approximately $4.65 trillion (as of Dec. 31, 2014) on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives, and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world. 1 must consider the overall market ecosystem, of which asset managers are only one component. This includes recognizing that assets are managed directly by asset owners as well as outsourced to asset managers. The variety of investment vehicles available including mutual funds, separate accounts, hedge funds, private equity funds, among others must also be recognized. McKinsey & Company estimates that approximately 75% of the world’s financial assets are managed directly by the asset owner, 2 with the remaining approximately 25% managed by asset managers in separate accounts (approximately 10%) and funds (approximately 15%).3 In the absence of a holistic approach, or if regulation is targeted at a subset of participants or investment vehicles within the market ecosystem, the Council’s efforts will move risks from one part of the market ecosystem to another or create market distortions without materially addressing its concerns. For example, if the solution to address risks in mutual funds were to mandate an explicit cash buffer in every mutual fund, this would result in a performance lag in mutual funds, likely incentivizing migration to other investment vehicles such as separate accounts. While large institutional investors would be able to set up separate accounts or manage their assets internally, individual investors would be disadvantaged. A holistic view of the market ecosystem is essential to the Council’s success in its efforts to address threats to U.S. financial stability and it is with this lens – as a participant within the market ecosystem – that we have approached our response to this Request for Comment. Looking at the financial system in 2015, the many reforms that have already been implemented have made the system safer than it was at the time of the 2008 financial crisis (“2008 Crisis”). In the wake of the 2008 Crisis, policy makers implemented numerous reforms to banks, over-the-counter (“OTC”) derivatives, cash pools, leverage limits, and private funds which have collectively created a safer, sounder financial system (see Exhibit 1). The Council should take into consideration the changed environment when evaluating asset management products and activities. 2 See McKinsey & Company, Strong Performance but Health Still Fragile: Global Asset Management in 2013. Will the Goose Keep Laying Golden Eggs? (2013). Also see BlackRock, ViewPoint, Who Owns the Assets? Developing a Better Understanding of the Flow of Assets and the Implications for Financial Regulation (May 2014), available at http://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-who-owns-the-assets-may-2014.pdf (“Who Owns the Assets ViewPoint”) 3 Source: BlackRock estimates using McKinsey & Company and ICI data. For further detail See our ViewPoint publication entitled “Fund Structures as Systemic Risk Mitigants.” BlackRock, ViewPoint, Fund Structures as Systemic Risk Mitigants (Sep. 2014), available at http://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-fund-structures-as- systemic-risk-mitigants-september-2014.pdf (“Fund Structures ViewPoint”). 2 Exhibit 1: Major Financial Legislation and Regulation Since 2008 Crisis While it is important to recognize the positive impact of financial regulatory reform, it is equally important to recognize the needs of end-investors and the cumulative impact that public policies adopted after the 2008 Crisis – both regulatory and monetary – have had on the investment opportunities for these end-investors. For example, for asset owners who need to generate income from their investments or fund liabilities, such as pension plans, insurers, and retirees that are reliant upon their savings to support themselves, the prolonged nature of an extremely low interest rate environment has challenged their ability to meet their investment objectives. Moreover, these same investors may face steep losses on their investments if monetary policy changes are implemented too quickly. Today, many asset owners find it necessary to “reach for yield” by taking on more risk in order to meet their anticipated liabilities or income requirements. Indeed, the Securities and Exchange Commission (“SEC”) recently noted the need to disclose to investors the potential impact of the tapering of the Federal Reserve’s quantitative easing program.4 In addition, the SEC announced a sweep exam of fund companies to review how well they are prepared for changes in the interest rate environment.5 Monetary policy has become a primary driver of increasing allocations to higher yielding assets, such as high yield bonds, emerging markets debt (“EMD”) and bank loan assets. Amongst the ways the market awards higher yields is by making investors give up some of the market liquidity of their investments. This was not directly addressed in the Request for Comment but should be taken into consideration when the Council reviews responses to Section I, “Liquidity and Redemptions.” In particular, we note that the increased demand for income-generating assets is sometimes incorrectly attributed to an independent decision on the part of asset managers, rather than being properly attributed to the portfolio allocation decisions of asset owners. In addition to responding to each question in the Request for Comment individually, we highlight several broad themes and recommendations in our responses. Note that in a number of cases we highlight existing definitions and methodologies in various regulatory jurisdictions that can be used or adapted to address the questions being raised. In these situations, we advocate for global harmonization, wherever possible, rather than the creation of new and 4 SEC, IM Guidance Update, No 2014-01 (Jan. 2014), available at http://www.sec.gov/divisions/investment/guidance/im- guidance-2014-1.pdf. 5 Office of Compliance Inspections and Examinations, SEC, Examination Priorities for 2015 3 (Jan. 13, 2015), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf. Topics covered by the SEC staff’s sweep include liquidity (procedures, oversight, risks, stress
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