New Fed Bond Fund Will Release Monthly Borrower Reports: Quarles

The Federal Reserve Board plans to give the public more information than it has to about its new Secondary Market Corporate Credit Facility (SMCCF), a top Fed official told members of Congress last week.

The Fed is providing a total of $75 billion in U.S. Treasury cash for the SMCCF and a sister fund, the Primary Market Corporate Credit Facility, to try to keep COVID-19-related turmoil from wrecking the corporate bond market. The SMCCF is supposed to buy corporate bonds from investors one days when fear and confusion keep other players from buying bonds.

Randal Quarles, the Fed’s vice chair, talked about the SMCCF last week, during a web-based round table discussion organized by the House Financial Services Committee.

“We’re endeavoring to be quite transparent,” Quarles said. “We’ve got monthly disclosures that will be coming about the borrowers, and the amounts that are borrowed in many cases.”

The Fed will be releasing more information than the transparency rules that govern the SMCCF and PMCFF require, Quarles said.

Resources

Links to hearing resources, including a video recording of the hearing, are available here.
An article about the creation of the SMCCF is available here.

Rep. Ben McAdams, D-Utah, was the lawmaker who brought up the SMCCF topic.

The SMCCF is of keen interest to life insurers, because life insurers hold about $2.8 trillion in corporate bonds. The SMCCF is supposed to stick to buying the same kinds of corporate bonds that life insurers own: bonds from companies that started out with good credit ratings.

A Fed member bank, the Federal Reserve Bank of New York, hired Black Rock, a large asset manager, to manage Corporate Credit Facility LLC, the “special purpose vehicle,” or fund, that runs the SMCCF and PMCCF programs.

Critics have questioned whether the New York Fed has the legal authority to set up Corporate Credit Facility LLC, and whether the process used to pick Black Rock as the program manager was a good process.

McAdams asked Quarles to talk about how the Fed, or Black Rock, will make decisions about what corporate bonds to buy, and whether a term sheet the Fed has posted gives the complete story about who can sell the SMCCF and PMCCF bonds

“Are there additional underwriting criteria that the Fed is using in addition to that term sheet?” McAdams asked.

Quarles said the Fed has extended the term sheet by agreeing to invest in exchange-traded funds (ETFs) that focus on investment-grade corporate bonds, as well as to buy corporate bonds.

The underwriting criteria are set by the Treasury and the Federal Reserve, Quarles said.

“The investment manager that’s hired really is purely an administrative agent and does not make any policy decisions or underwriting decisions around the execution of that facility,” Quarles said. “We use credit ratings in order to determine who is eligible, and the facility will generally lend to all of those who meet the term sheet criteria.”

The Hearing

Members of the House Financial Services Committee organized the round table to hear the thoughts of the main U.S. “prudential regulatory” bodies. Prudential regulators are responsible for keeping financial institutions from failing.

In addition to Quarles, the witness list included Rodney Hood, the chairman of the National Credit Union Administration; Jelena McWilliams, chairman of the Federal Deposit Insurance Corp.; and Joseph Otting, comptroller of the Office of the Comptroller of the Currency.

Much of the conversation dealt with businesses’ access to loans.

The Business Interruption Insurance Issue

Rep. Ted Budd, R-N.C., asked Quarles about the idea of regulators making property and casualty insurers pay pandemic-related business interruption claims when business interruption policies contain pandemic risk exclusions.

“The Fed is not an insurance regulator, and so we haven’t taken a position on that question directly,” Quarles said.

Quarles noted that he’s the chair of the Financial Stability Board (FSB), an international organization that works to promote financial system stability.

“The FSB does work closely with the [International Association of Insurance Supervisors] in developing these issues that can have financial implications,” Quarles said. “Obviously, the solvency of the insurance industry globally has those implications.”

The IAIS has suggested that requiring insurers to provide pandemic risk benefits that aren’t included in business interruption policies could hurt the issuers’ solvency and reduce customers’ access to many kinds of insurance.

Quarles said he thinks the IAIS view was reached through a process that’s consistent with FSB processes.

U.S. financial services regulators are also talking about that topic, Quarles said.