BlackRock, the mammoth fixed-income investor with nearly $400 billion in total assets under management, is trying to persuade institutional investors to amend their guidelines to allow the firm to enter credit default swaps on their behalf, said Laurence Fink, chairman and CEO. The increased use of default swaps would come at the expense of investing in bonds.
Fink said BlackRock is encouraging clients to adopt the changes because the cash bond markets are more difficult to maneuver in because of collateral sourcing challenges. Ideally, BlackRock would first take exposure on a given credit through the default-swap market and would then pare its synthetic holdings once it was able to acquire exposure through bonds themselves, Fink said. To be sure, BlackRock is already an active participant in the default swap market and uses the instruments widely in its mutual fund accounts. But this strategy is not an option for many of the firm's pension plan clients because only about 65 of the 400 odd plans it runs money for have approved the use of such default swaps, he noted.
"It will become a more dominant, mechanistic way for us to trade around the markets," Fink said, referring to BlackRock's ramping up of its use of default swaps. He said the manager's broader view is the rapid growth of the credit derivatives market is one of the most important issues facing the capital markets, in addition to the expanding opportunities in Asia.
Fink's comments came at last week's American Securitization Forum annual meeting in New York.
