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SMCCF Investment Management Agreement: What You Need to Know
The SMCCF (Secondary Market Corporate Credit Facility) was established by the Federal Reserve as part of its efforts to support the economy during the COVID-19 pandemic. The SMCCF aims to provide liquidity to the bond market by purchasing eligible corporate bonds and ETFs (exchange-traded funds).
To manage the assets of the SMCCF, the Federal Reserve Bank of New York entered into an agreement with BlackRock Financial Management Inc. (BlackRock) in March 2020. This agreement, known as the SMCCF Investment Management Agreement, outlines the roles and responsibilities of BlackRock in managing the assets of the SMCCF.
Let’s take a closer look at the key provisions of the SMCCF Investment Management Agreement.
Investment Guidelines
BlackRock is responsible for investing the assets of the SMCCF in eligible corporate bonds and ETFs, subject to certain investment guidelines. These guidelines include:
– Credit quality: Only eligible securities rated at least BBB-/Baa3 by two or more NRSROs (nationally recognized statistical rating organizations) are allowed.
– Maturity: The portfolio must have an average remaining maturity of five years or less.
– Diversification: The portfolio must be diversified across issuers, sectors, and asset classes.
– Pricing: BlackRock must use fair value pricing when determining the value of the securities in the portfolio.
Risk Management
BlackRock is also responsible for managing the risks associated with the SMCCF portfolio. To mitigate these risks, BlackRock must:
– Monitor the portfolio on an ongoing basis to identify and manage risks.
– Take appropriate action to address risks as they arise, including selling securities if necessary.
– Use risk management tools such as derivatives to hedge against market risks.
Fees
BlackRock will be paid fees for managing the assets of the SMCCF. The fees will consist of a base fee and a performance fee. The base fee is 0.05% per annum of the net asset value of the portfolio, while the performance fee is based on the outperformance of the portfolio relative to its benchmark.
BlackRock is subject to clawback provisions, which means that if the performance fee exceeds a certain threshold, BlackRock must pay back a portion of the excess to the SMCCF.
Conclusion
The SMCCF Investment Management Agreement is an important document that outlines the responsibilities of BlackRock in managing the assets of the SMCCF. By following the investment guidelines, managing risks, and being transparent about fees, BlackRock is expected to help the SMCCF achieve its goals of providing liquidity to the bond market and supporting the economy during the COVID-19 pandemic.