Public Policy ViewPoints
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Through the Public Policy ViewPoint series, BlackRock examines public policy issues and assesses the potential long-term implications for investors.
This engagement review is intended to explain BlackRock’s overarching philosophy in relation to corporate governance and responsible investment and provide practical examples of our work in 2012. It is organized on a variety of overlapping themes, which provide a sense of the breadth and complexity of this aspect of BlackRock’s work on behalf of clients.
The fiscal condition of state governments continues to improve nearly five years after the onset of the financial crisis. While challenges remain in the current environment of slow economic growth, states have taken the necessary actions to balance budgets and to ensure full and timely payment on debt obligations. In fact, the vast majority of states were successful in balancing their fiscal year (FY) 2013 budgets on or ahead of the July 1, 2012, start. This report reviews the progress states have made in balancing budgets in this post-Great Recession environment.
Financial benchmarks are under review by multiple regulators around the world as a result of the allegations of manipulation of LIBOR that have surfaced. We commend the efforts to learn more about financial benchmarks, as they are used by a wide range of investors and market participants. As the discussions proceed, however, we caution regulators to carefully evaluate what types of reforms may benefit investors and which may impose unintended harm. This paper outlines the key differences between rate benchmarks and market benchmarks (commonly called market indices), and advocates prudent reform that is in the best interests of investors and financial markets.
This ViewPoint underlines the importance of enhanced risk disclosure by banks in restoring trust in the banking system. The paper outlines the key principles and recommendations for enhanced risk disclosure set out in the Enhanced Disclosure Task Force (EDTF) report, published in October 2012, that BlackRock helped co-author.
While BlackRock is known as a large asset manager, our size says little about our structure and risk profile, our history, or how we function today. In this ViewPoint, we provide an overview of our organization and discuss the factors that differentiate BlackRock specifically, and the asset management industry more generally.
A fundamentally important pillar of the current regulatory reform effort centers on achieving consistent and predictable frameworks for the recovery and resolution of failing financial institutions and, in particular, banks. This ViewPoint summarizes some of the current proposals for recovery and resolution of financial institutions around the world. It sets out a number of key questions about the process for investors and the unintended consequences for the investability of banks if these questions are left unanswered. Finally, it makes a number of recommendations, based on common principles underpinning the global regulatory focus on these issues, on how to address investor concerns with resolution authority.
Housing was a central protagonist in the 2008 financial crisis and remains an important touchstone for the US economy today. Encouragingly, recent market trends are positive in residential housing: home price indices are rising, sentiment is improving and mortgage rates are at all-time lows. Still, it is clear there is much work to be done to restore not only the US housing market, but the financing mechanisms that helped the sector thrive for decades. In this ViewPoint, we review some of the programs and proposals related to housing finance, and identify important issues for attracting investors to those assets that support this vital economic sector.
The New Year began with Congress finally agreeing to a partial deal to avoid (or at least delay) the worst of the much-discussed "fiscal cliff" of scheduled tax increases and spending cuts. This paper provides an overview of the deal and discusses what it means for the economy and financial markets.
The UK Retail Distribution Review (RDR) will abolish the commissions received by financial advisers for selling products and replace them with fees for advice to be agreed with the client upfront. The FSA's main objective in RDR is to improve consumers protection when purchasing investment products. This ViewPoint examines whether RDR is likely to meet this objective and what the potential pitfalls may be as well as the challenges that may remain once the new rules are fully in place by the end of next year.
Topping the to-do list of re-elected US President Barack Obama is striking a deal on the nation's budget – a goal that so far has proven elusive. This publication discusses this key challenge and other market implications of the US elections.
The US election and "fiscal cliff" of tax hikes and spending cuts are looming large in global financial markets adding to uncertainty for investors and policymakers alike. This paper considers a number of scenarios for the US elections as well as risks and investment opportunities before and after the elections.
When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, it set an ambitious schedule for the implementation of reforms. While much attention has been given to the number of missed deadlines for new rules, mandatory clearing for interest rate swaps and index credit default swaps now has real deadlines and industry participants are in various stages of preparedness. Even though some rules remain in the proposed stage, market participants should develop their plans to meet this requirement. This paper focuses on those necessary steps, with an emphasis on what the clearing mandate means for institutional investors in the US markets.
Policymakers globally continue to grapple with the regulation of Money Market Funds in the wake of the 2007/2008 financial crisis. A seemingly simple product has challenged some of the best regulatory, industry and academic minds, and consensus on a proposal for additional reforms still appears to be elusive. We at BlackRock have been deeply engaged in these discussions and – like others – have worked on numerous proposals for reform based on the lessons learned in 2008. In this paper, we propose a path forward that takes into account the various concerns and objections that have been raised in past discussions.
This ViewPoint considers if European corporate debt markets can withstand the challenges they currently face from the current macro-economic conditions coupled with an intense period of regulatory change. The Review of the Markets in Financial Instruments Directive (MiFID) in Europe could herald an unprecedented shift in how fixed income market makers would be obliged to report to regulators and to the market. In this paper, we focus on whether the current reform of European fixed income market structure would bring added value for end-investors or if the costs of proposed reforms exceed their potential benefits. In conclusion, we provide recommendations to address the public policy intentions behind the reforms whilst protecting the fixed income markets from increased liquidity pressure.
On July 6, 2012, President Obama signed into law the Moving Ahead for Progress in the 21st Century Act ("MAP-21, or "The Highway Bill"). In addition to transportation funding, this bill also includes two important provisions for corporate pension plans - (i) allows companies to make lower pension contributions for the next few years; and (ii) raises premiums paid to the Pension Benefit Guaranty Corporation ("PBGC"). This paper explains the implications of these provisions for corporate pension plans.
The recent issues surrounding LIBOR highlight two key, yet separate issues: alleged manipulation of LIBOR during the precrisis period, and the alleged underreporting of LIBOR due to the stigma issues at the height of the 2008 credit crisis. The conflation of these two distinct issues have cast doubt on the credibility of the LIBOR rate setting process. Lost in the noise is the importance of reforming this process to regain the confidence of market participants. This paper highlights the need for industry-wide benchmarks and makes specific suggestions for reforms of the LIBOR rate setting process to help it regain credibility.
While the political alignment of a government has had little discernible impact on market performance, policy does. Economic positions, such as tax policy, have in the past influenced how financial markets behave. For investors looking to handicap the impact of November's elections, we believe there are three policy prisms through which to judge the outcome: potential for avoiding the "fiscal cliff," impact on tax policy, and the extent to which the outcome raises or lowers the likelihood of dealing with longer-term imbalances, specifically the unsustainable nature of the current entitlement system and the growing dysfunction of the US tax code.
This ViewPoint gives a detailed explanation of the Credit Valuation Adjustment risk charge under the Capital Requirement Directive IV (CRD IV) and shows the implications for European pension plans.
This ViewPoint gives a detailed explanation of central clearing requirements for OTC derivatives in the European Union and shows the implications for European pension plans.
Various indicators are teasing investors and homeowners. US housing prices may finally have scraped bottom. The latest BlackRock Investment Institute publication explores when this critical market is likely to recover, offers a roadmap for housing policy and identifies investment opportunities.
We present a model to determine how long it will take to reach a supply-demand equilibrium in US housing; offer a holistic policy approach to get the market back on solid footing; and dissect the national and regional trends underpinning US housing. This market has global resonance: Housing dominates sentiment of the consumers who power 70% of the world's largest economy.
Policy makers face currently the significant challenge of instituting regulatory reform that addresses weaknesses in the regulatory environment without stifling key drivers of growth, such as investment in bonds and equities that can help provide income in retirement for individuals. This ViewPoint provides a broad overview and analysis of a number of current regulatory initiatives that have the greatest impacts on end-investors.
In the wake of the financial crisis, securities lending has come under review by regulators in various jurisdictions. In this ViewPoint, we describe securities lending transactions, assess the risks involved, and respond to a series of questions posed by regulators. We also provide a number of recommendations for improving securities lending practices.
The JOBS Act, short for Jumpstart Our Business Startups Act, was signed into law by President Obama on April 5, just weeks after it won bipartisan approval in both the House and the Senate. The law redefines provisions around IPOs, expands permissible advertising for private investment products and facilitates access to startup capital. As an investment manager and a fiduciary for individual and institutional investors, we believe the JOBS Act encourages capital formation while incorporating important protections. In this ViewPoint, we summarize the key components of the law and offer an investor's perspective.
The financial crisis brought into sharp focus a number of weaknesses in the Credit Rating Agency (CRA) business model. Regulators, globally, have sought to address these weaknesses in the CRA business model and to modify investor behaviour by discouraging an over-reliance on ratings. In Europe, the third reform of CRA regulation ("CRA3") since the financial crisis is currently underway. This paper provides background on the use of ratings in the investment process, establishes the case for further reform of CRAs and the ratings process and summarises concerns expressed by investors with respect to the CRA3 proposal in Europe.
Money market funds have been a topic of discussion — and often vehement disagreement — among regulators and market participants since the 2008 financial crisis and historic "breaking of the buck" by the Reserve Primary Fund. At this juncture, given regulators' stated intention to move forward with structural reform, it is important to identify a proposal that preserves MMFs and is acceptable to as many industry participants as possible. The model expected to be put forth by the SEC provides the option of either: i) a stable-NAV MMF with capital buffers plus redemption restrictions or ii) a floating-NAV MMF. In this paper, we examine the merits and implications of these ideas. We also consider the case for whether regulators have already done enough.
The high drama and furious pace of developments in the European debt crisis have not let up. This paper reviews the outcome of December 9 European summit and discusses what it means for markets and investors. The primary takeaways include: The actions by the European Central Bank to secure bank access to funding reduce the possibility of a doomsday credit crunch. Ratings agencies are likely to downgrade eurozone debt in the near future, but markets have largely factored in these moves. And BlackRock now expects a eurozone downturn that will cut GDP by 1% to 2% and push Germany and France into recession.
Much has happened over the past decade to reshape the economic landscape. The greater sophistication and more complex structure of financial markets, rapid technological developments, and the increase in third-party intermediated distribution models have enhanced the opportunities available to investors. In this ViewPoint, we look at how to rebuild investor confidence in the light of European proposals to update consumer regulation of financial services. We consider how to preserve investor choice and make specific recommendations to improve the regulation of product providers and distributors.
In this ViewPoint, we provide background on the history and structure of ETFs, summarize recent concerns that have been raised by regulators, and recommend reforms that would improve the marketplace for ETFs. We explicitly support uniform standards on labeling, transparency, disclosure, and reporting that would reduce systemic risk, improve investor protection, and help ensure that investors understand precisely the risks and attributes of the products that they are purchasing.
Proposals related to further structural reform of money market funds remain highly topical today. In this ViewPoint, we review the objectives and constraints surrounding additional reform, focusing specifically on capital solutions. As change is considered, care must be taken to ensure that the reforms, both individually and collectively, achieve the objective of protecting investors without inadvertently destabilizing financial markets.
The debt ceiling crisis came down to the wire on August 2, 2011 as Congress voted on a framework to raise the debt ceiling and reduce spending over the next decade. These developments are clearly positive in terms of reducing the risk of a US debt default. Although these actions have reduced the likelihood of a downgrade by one or more of the rating agencies, that risk is still not at zero. In this paper, we review the significant uncertainties that remain.
The US government will be forced to make difficult decisions in preparation of the debt ceiling being reached. If it is not raised by August 2, 2011 (or earlier, since the legislation has to be drafted, reviewed, passed, reconciled, and subsequently signed), according to Treasury Secretary Timothy Geithner, the US will begin to default on some of its obligations. In this paper, we assesses the current situation leading up to the deadline and highlights the major unintended consequences for investors and the global economy if US debt is downgraded.
Three years after implementation, the cornerstone of financial market regulation in the EU - the Markets in Financial Instruments Directive (MiFID) - is under review. We have a strong interest in competitive and efficient markets and a regulatory regime that encourages liquidity, transparency, and price discovery. In this ViewPoint, we focus on global policy discussions pertinent to today's equity market landscape in Europe and the case for refinement, rather than revolution, of the existing regime.
Enhanced regulation of the commodity derivatives markets has been on the agenda of elected officials for some time. In this ViewPoint, we provide historical background on commodity derivatives market regulation, examine the Commodity Futures Trading Commission's (CFTC's) current proposal, and assess the ways in which the new regulatory regime could impact investors.
The events of 2008, including the historic "breaking of the buck" by the Reserve Primary Fund in September of that year, brought to light both idiosyncratic (fund-specific) and systemic (industry-wide) risks associated with money market funds, and gave rise to several reform measures designed to enhance the stability of that segment of the market. The Dodd-Frank Act subsequently instructed the SEC to make certain additional changes to money fund regulations. One recent proposal resulting from this mandate addresses the use of NRSRO ratings by fund advisors. In this ViewPoint, we assess the SEC proposal, highlighting our belief that while advisors must conduct independent credit evaluations, ratings provide useful preliminary screens in the evaluation process.
The Foreign Account Tax Compliance Act (FATCA), enacted into law last year with a January 2013 effective date, is an attempt to address tax evasion by US taxpayers by directing global financial firms, including non-US ones, to identify the underlying ownership of assets they hold. The financial impacts for investors could be quite severe. In this ViewPoint, we explore the potential implications and make a series of recommendations for the development of fair and administrable rules.
A Regulatory Roadmap is Not Banking Territory: Evolving Trends in Capital Requirements and Responses to Regulation
Legislation stemming from the global financial crisis has resulted in a dramatic reshaping of the relationship between the banking sector and its regulatory overseers, with profound implications for investors across the capital structure. In this paper, the BlackRock Investment Institute explores key issues, which were debated recently at the Institute's Bank Capital Workshop. "A Regulatory Roadmap is Not Banking Territory: Evolving Trends in Capital Requirements and Responses to Regulation," draws on the participation and insights of dozens of senior portfolio managers from across the firm, as well as Advisory team professionals, to generate an outlook that drives enhanced investment performance for clients.
The AIFMD is one of the most radical, politicized, and controversial directives reshaping fund management and marketing regulation in the EU. The impetus behind the Directive was to prevent hedge funds posing risk to European financial stability, though the scope is far wider than just hedge funds and private equity. Although the final text of the AIFMD is far better than the original Commission proposal, we are continuing to engage at Level 2 (implementation measures) with trade associations and regulators on behalf of our clients. Investors should continue to have access to best-in-class funds wherever such funds are domiciled or managed.
While it took months to sift through the data to determine what actually happened on May 6th - and we still do not know for certain what triggered the Flash Crash - the lesson of the event was clear from the beginning: better rules are needed to help protect investors, and to reflect the tremendous evolution that has occurred in the markets in recent years. What has happened since the Flash Crash to reform markets to reduce the risk of a similar event?
Municipal bond markets continue to make headlines, but has default risk been overestimated? In this ViewPoint, we examine the current risks - particularly as they relate to public pension plans obligations - and investment opportunities.
In this ViewPoint, "UCITS IV Key Investor Information Document: The Challenge of Providing Clear Product Disclosure," we provide background on the Key Investor Information Document (KIID), which will replace the existing simplified prospectus. Following the financial crisis, there was a strong drive to provide clearer product information to investors. The KIID identifies the key elements of a fund, helping investors to understand the nature and risks of the fund in order to make more informed investment decisions.
During the financial crisis, the insurance industry, which is currently regulated at the state level by commissioners, came under scrutiny. In this paper, "Financial Regulatory Reform: Important Developments for Insurance Companies," we explore how recent developments, including the establishment of the Federal Insurance Office, may impact the industry in the future.
The Regulated Investment Company (RIC) Modernization Act of 2010, which was signed into law on December 22, 2010, makes changes to a number of technical rules related to the tax treatment of RICs. Prior to the enactment of this legislation, the statutory framework governing RICs had not been meaningfully updated since the passage of the Tax Reform Act of 1986. In this paper, we summarize the major provisions of the Act, highlighting areas of notable improvement.
In this paper, "Getting Housing Finance Back on Track," we recommend a set of guiding principles to be considered when evaluating US housing finance policy. We also assess the options presented in "Reforming America's Housing Finance Market - A Report to Congress," which was released by the US Treasury Department and US Department of Housing and Urban Development on February 11, 2011.
In this paper, "Regulatory Developments in Europe", we review key regulatory developments affecting the European financial sector, the markets, businesses and investors. We also consider the implications- including opportunities- that could arise from the new legislation, enacted at both the European and national levels, with a number of US legislative initiatives also set to impact the European financial industry in the relative short term.
In this paper, we review several proposals outlined in the "Money Market Fund Reform Options" report issued by the President's Working Group on Financial Markets. While the proposed solutions are many, we believe the goal of the investment community and policymakers is one and the same: reduce systemic risk without damaging money market mutual funds' important role as a source of value to investors and funding to the short-term capital markets.
In this paper, "The New Regulatory Regime for Money Market Funds: A Window into the Mark-to-Market NAV," we review some of the factors that influence the mark-to-market NAV and its characteristic daily fluctuations. Ultimately, we believe that the new regulatory regime will prove beneficial to investors by supplying them with more detailed information on fund managers' investment philosophies and approaches to risk management.
In the wake of the financial crisis, legislators and regulators around the world have initiated a variety of proposals aimed at reducing the systemic risks posed by OTC derivatives. In this ViewPoint, "OTC Derivative Market Reforms: An Investor Perspective," we summarize current proposals, offer our views on their effectiveness, and highlight issues that should be addressed before new rules take effect.
Understanding the Flash Crash: What Happened, Why ETFs Were Affected, and How to Reduce the Risk of Another
Although several months have passed since the Flash Crash occurred, uncertainty remains on the trigger or triggers for the sudden U.S. equity free fall (and recovery) on the afternoon of May 6. However, the lesson of the event is clear: better rules are needed to protect investors, and to reflect the tremendous evolution that has occurred in the markets in recent years. In this ViewPoint, "Understanding the 'Flash Crash,'" we explore what happened on May 6, how it affected investors, and what can be done to lessen the likelihood of similar market disruptions in the future.
The adoption of recent regulatory proposals in the U.S. could have a dramatic impact on the mutual fund industry. In this ViewPoint, "Mutual Funds in the Spotlight: Is a Paradigm Shift Necessary or Desirable?," we assess the potential implications of the proposals and recommend an approach that promotes investor protection without undermining the solid foundation on which mutual funds have thrived.
In this ViewPoint, "Fin Reg and Beyond: Global Implications for Investors," we discuss current and pending financial regulatory reform. We summarize various studies, proposals, and legislative changes in the U.S. and Europe and describe the likely impacts for investors.
In this ViewPoint, "Financial Regulatory Reform: Reform Arrives in the Boardroom," we examine the corporate governance provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that alter dynamics between investors and shareholders.
In this ViewPoint, "The Rise of UCITS III," we examine recent regulatory changes in Europe that have allowed regulated mutual fund structures to deploy enhanced investment powers, enabling leverage, paving the way for the use of derivatives, and making absolute return products available to the retail investor.
One recommendation, among a series of regulatory reform proposals, is that money market funds – known and appreciated for their stable NAV structure – assume a floating NAV structure. In this ViewPoint, "Money Market Mutual Funds: The Case Against Floating the Net Asset Value," we suggest that such a change would not simply alter the nature of a single investment vehicle, but would have far-reaching implications and negative consequences for the entire financial system.
Following the U.S. Congress conference committee's approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we highlight the major provisions of the bill and analyze their likely impacts.
U.S. Congress and regulatory agencies have been considering various measures to strengthen the regulatory framework governing the financial services industry for over a year. The past month has seen a flurry of activity and clarity is beginning to emerge on a number of fronts. Although firm decisions have yet to be made, and current proposals may change considerably before they are finalized, we share our thoughts on a number of issues that could have a broad impact across companies, products, and markets in this ViewPoint, "Financial Services Regulatory Reform: A Discussion of Proposed New Rules and Legislation."
While we support efforts to improve the regulation and oversight of the OTC derivatives market, we want to ensure that new restrictions on these important financial instruments address existing risk concerns without creating unintended negative consequences.
In this ViewPoint, "Money Market Funds: A Proposal for a Capitalized Special Purpose Entity," we examine both the role of money market funds and the ways in which idiosyncratic risk and systemic risk can be significantly mitigated, resulting in a beneficial outcome for issuers, investors, and the financial system.
The credit crisis and its aftermath have fundamentally changed mortgages and the mortgage-backed securities market, and have threatened to make U.S. homeownership significantly less affordable. As a fiduciary for investors and a major investor in the mortgage sector, we are concerned that the current U.S. policy approach is not achieving its objectives and may have long-term, negative implications for both homeowners and capital markets.
These materials are part of a series of BlackRock public policy materials, published under the ViewPoints heading and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the dates specified in the materials posted and may change as subsequent conditions vary. The information and opinions contained in these materials are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.
These materials may contain "forward-looking" information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in these materials is at the sole discretion of the reader.
These materials are being distributed/issued in Australia and New Zealand by BlackRock Financial Management, Inc. ("BFM"), which is a United States domiciled entity. In Australia, BFM is exempted under Australian CO 03/1100 from the requirement to hold an Australian Financial Services License and is regulated by the Securities and Exchange Commission under US laws which differ from Australian laws. In Canada, these materials are intended for permitted clients only. BFM believes that the information in this document is correct at the time of compilation, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BFM, its officers, employees or agents. Latin America these materials are intended for Institutional and Professional Clients only. These materials are solely for educational purposes and do not constitute an offer or a solicitation to sell or a solicitation of an offer to buy any shares of any fund (nor shall any such shares be offered or sold to any person) in any jurisdiction within Latin America in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in these materials, it is possible that they have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico and Peru or any other securities regulator in any Latin American country and no such securities regulators have confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America.
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