A recently adopted New York state insurance regulation involving bond exchange-traded funds and insurers was hailed by Robert S. Kapito, president and a director at BlackRock, during the company's Jan. 14 earnings call, but a company spokesman Friday declined to say whether BlackRock was among those that had submitted comment letters in support of it.
The New York State Department of Financial Services, the state's insurance regulator, in December published a new regulation that, until Jan. 1, 2027, allows shares of an ETF to be treated as bonds for the purpose of a domestic insurer's risk-based capital report provided the ETF meets certain criteria.
"This puts bond ETFs on a level playing field with bonds in an insurer's portfolio," Mr. Kapito said Jan. 14 during the company's earnings call for the fourth quarter 2021, adding that BlackRock is "very excited about the fact that insurers now will use more ETFs to represent their bond portfolio."
The difference between treating a holding as debt rather than equity for risk-based capital purposes "is orders of magnitude," attorney Daniel A. Rabinowitz, a partner at the law firm Kramer Levin Naftalis & Frankel, said in a November interview. "You have to hold much, much more capital against equity securities."
Among criteria an ETF must meet to qualify under the new regulation are that the fund tracks a bond index and has at least $1 billion in assets under management. A public comment period held prior to the regulation's adoption attracted responses from a life insurance industry trade association, an asset managers' trade association and five money managers, according to assessment of public comments published on the DFS website, which did not identify those commenting.
BlackRock doesn't comment on its engagement with regulators, a BlackRock spokesman said.
While the comment letters from the two trade associations and three of the asset managers expressed "unqualified support" for the new regulation, two other asset managers asked that the favorable treatment be extended to actively managed fixed-income ETFs, the assessment said.
"Limiting the regulation's applicability to index-tracking fixed-income ETFs best ensures that the ETF portfolio's management follows a rules-based approach that approximates a more conservative buy-and-hold-type strategy as opposed to active trading," the assessment said. "Accordingly, DFS did not make any changes in response to this comment."
In its comment letter, the Life Insurance Council of New York said it "strongly believes that bond (ETFs) have become an increasingly important investment and risk management tool for insurance companies, especially as the markets have experienced volatility in recent years."
Bond market liquidity has diminished relative to what it was prior to the 2008-09 financial crisis "and as a result, sourcing bonds has become a costly and time-consuming effort," the Nov. 16, 2021, letter signed by Timothy D. Atkins, the council's managing director and counsel, said.
"Meanwhile, liquidity in bond ETFs has steadily grown," the letter said.