ETF lending on the rise, says M'Rabti
20 February 2017 Brussels
Image: Shutterstock
Agent lenders are “getting serious” about including exchange-traded funds (ETFs) in their lending programmes thanks to a transactional hurdles being removed, according to Euroclear’s Mohamed M'Rabti.
“Everyone talks about removing the huge frictional costs associated to settling the ETFs in the local central securities depository (CSD) as well as the effort to realign positions between CSDs,” he said in recent blog post.
“Obviously, the conversation then moves to ‘liquidity’ and how it is fragmented in a given ETF across different locations, making it difficult to locate the shares. Multiple ISIN or SEDOL codes make for added complexity.”
M'Rabti added that when liquidity was concentrated in structures, such as iShares, it is much easier for agent lenders to use ETFs for securities lending and collateral management.
“I know one that has recently reclassified its holdings of ETFs into separate asset classes—equity-based and fixed-income based—as a prelude to creating new lending pools.”
M'Rabti noted that loan balances are rising, but there are fluctuations.
It was also highlighted in the blog post that beneficial owners are in need of further education.
“Agency lenders cannot determine where their clients choose to hold their ETF positions. But they can encourage them to shift the shares into Euroclear in order to facilitate their inclusion in a lending programme. Many are doing just that,” concluded M'Rabti.
“Everyone talks about removing the huge frictional costs associated to settling the ETFs in the local central securities depository (CSD) as well as the effort to realign positions between CSDs,” he said in recent blog post.
“Obviously, the conversation then moves to ‘liquidity’ and how it is fragmented in a given ETF across different locations, making it difficult to locate the shares. Multiple ISIN or SEDOL codes make for added complexity.”
M'Rabti added that when liquidity was concentrated in structures, such as iShares, it is much easier for agent lenders to use ETFs for securities lending and collateral management.
“I know one that has recently reclassified its holdings of ETFs into separate asset classes—equity-based and fixed-income based—as a prelude to creating new lending pools.”
M'Rabti noted that loan balances are rising, but there are fluctuations.
It was also highlighted in the blog post that beneficial owners are in need of further education.
“Agency lenders cannot determine where their clients choose to hold their ETF positions. But they can encourage them to shift the shares into Euroclear in order to facilitate their inclusion in a lending programme. Many are doing just that,” concluded M'Rabti.
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