State Street Global Advisors received several inquiries from insurance company clients during a generally quiet time of year that all involved the same thing: new regulations that make it easier for New York insurers to hold funds exchange-traded bonds as part of their portfolios. .
“Five or six calls — just around Christmas time, when people’s computers are turned off — about this made it very clear to me that New York has done a very good thing here,” said Ben Woloshin, vice president and Head of SPDR Insurance at SSGA. an interview on Wednesday.
And the insurers, whom Mr. Woloshin declined to name, weren’t the only ones interested in regulations passed by the New York State Department of Financial Services that went into effect Dec. 15. His team also responded to requests from investment consultants. who work with insurers as well as brokers who trade ETFs on behalf of insurers, he said.
The new regulations, which Woloshin says is something ETF issuers including SSGA, BlackRock and Vanguard Group have long advocated, state that until January 1, 2027, shares of an ETF at fixed income will be treated as obligations for the purpose of a national insurer’s risk-based capital report if the ETF meets certain criteria.
The difference between treating a stake as debt rather than equity for venture capital purposes is important because “you have to hold much, much more capital versus equity,” the lawyer said. Daniel A. Rabinowitz, partner at the law firm Kramer Levin. Naftalis & Frankel.
Because they bundle fixed-income securities into an equity portfolio, bond ETFs have long had “many square-peg/round-hole problems,” said Ben Johnson, director of exchange-traded fund research. worldwide for Morningstar.
The ETF industry has been working for years to open up new markets for bond ETFs, “and this is just the latest example of adapting a legacy framework to accommodate an instrument that was not envisioned when it was created. “said Mr Johnson.
“I think this is yet another validation of the value of bond ETFs, and I expect it will drive greater adoption among insurers,” he said.
To qualify under the new regulations, an ETF must track a bond index and have at least $1 billion in assets under management. It must also be rated by a nationally recognized statistical rating organization, such as S&P Global Ratings. SSGA managed to have 19 of its fixed income ETFs rated in “a very, very short time by S&P”, said Woloshin, adding that SSGA is “very pleased for our clients” that the new regulations are now in effect. . effect.
“It gives the New York insurer community an additional tool to help them build more effective portfolios,” he said, adding that based on the 2020 data he’s seen, insurers in New York account for about 24% of all US insurers’ fixed income assets. .
Given its size, demand from the New York insurance community for fixed income ETFs is likely to drive increased assets under management not just for SSGA, but for the ETF industry in general, a- he declared.
New York has done “thorough due diligence” and “sets a standard for other states to follow,” said Woloshin, who testified last year on behalf of planned state legislation in Massachusetts that involves also bond ETFs.
“It’s very helpful for the insurance industry,” he said of the New York regulations. “It obviously helps us, but I think when you see the kind of teamwork that has happened between ETF issuers, New York State and the insurance community, it all comes together. in a very positive way.”
A BlackRock spokesperson declined to comment, saying the asset manager was not discussing its engagement with regulators. A Vanguard spokesperson also declined to comment. However, in an October 2021 comment letter to DFS, Vanguard expressed support for the proposed settlement.
“Without the department’s proposed approach, many insurers struggling to gain efficient access to bond markets would no longer have access to the bond ETF option, which offers the benefit of low-cost, liquid, transparent bond portfolios and diverse,” Vanguard’s letter says. “This would result in a continued reliance by insurance investors on the less liquid, opaque and more expensive over-the-counter markets for individual bonds.”