* Part of Financial Stability Board consultation
* Comes ahead of planned rule changes at end-2017
* BlackRock, Vanguard among those to respond (Adds Vanguard, bullet points, background)
By Simon Jessop
LONDON, Oct 3 (Reuters) - BlackRock, the world's biggest asset manager, has told an international financial watchdog it supports plans to stress test individual mutual funds to make sure they function properly during extreme market conditions.
Global regulators are concerned about the ability of funds to function during periods of market turmoil - including being able to pay back investors - and had asked leading industry participants to respond to proposed rule changes.
In June, the Financial Stability Board (FSB), set up after the financial crisis to ensure the stability of the financial system, proposed 14 measures to be implemented from the end of 2017, including monitoring leverage and stress testing.
In a Sept. 21 letter to the FSB posted on its website, BlackRock said: "We believe there is merit in developing principles for the stress testing of individual open-end funds", but rejected any form of system-wide stress test.
Vanguard, the world's second-biggest asset manager, said in its response it would not back a rule mandating the widespread stress-testing of individual funds in a specific way.
"We do not agree ... that authorities should require stress tests and provide guidance on how they should be conducted," it said in a letter to the FSB seen by Reuters.
However, Richard Withers, the head of government relations for Vanguard Europe, told Reuters the firm supported the general principle of fund-level stress-testing, as long as firms had discretion over the details.
BlackRock added it was important to remember the liquidity stress testing of funds was different from that of banks, with managers needing to avoid a fire sale of assets to meet redemptions.
"Liquidity risk stress testing is one tool that can be helpful to ensure fund managers are maintaining appropriate liquidity," it said in its letter.
The issue of liquidity was highlighted earlier this year by the failure of a junk bond fund run by U.S. asset manager Third Avenue, whose illiquid assets could not be sold quickly enough to meet redemption requests, leading it to shut down.
More recently, a number of UK-focused property funds were forced to suspend trading after too many investors demanded their money back in the wake of Britain's vote to leave the European Union, although most have since reopened. (Reporting by Simon Jessop; Editing by Louise Heavens and Mark Potter)