BLK BlackRock Inc

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)

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