Where are all the ETF champions?
05 March 2021 UK
Image: Feodora/adobe.stock.com
The securities lending market must do more to fully leverage the “ideal” collateral instrument of exchange-traded funds (ETFs) as allocations into passive vehicles continue to soar, according to Citi’s global head of ETF products Andrew Jamieson.
Writing in the latest International Securities Lending Association (ISLA) quarterly report, Jamieson is calling on major players straddling the securities lending and ETF markets to take ownership of the challenges standing between greater use of these funds. To date, he says, the mission has mainly been led by “a small band of enthusiasts” hailing from the ETF space, rather than within the securities lending community.
“Illustrious names in securities finance such as State Street, Bank of New York, Brown Brothers Harriman, Northern Trust, BlackRock and J.P. Morgan — to name but half a dozen — are also the top names in the ETF industry, either as issuers or custodians, and often both. It cannot surely be too long before their clients and their colleagues become more vocal to the missed opportunities?” he writes.
Borrow demand for ETF shares and overall lendable availability have trended upwards over the past three year by what at first glance appears to be a good clip. But both these growth rates pale in comparison to the overall inflows into ETFs over the same period, which suggests there is much more to do.
According to Jamieson, greater acceptance is hampered by known “impediments” including “nomenclature challenges, multiple sedols (due to cross-listings), classification confusion (is it an equity, is it fixed income?)”.
He also argues ETFs have a perception problem among European institutional investors who see it as solely a retail product — a claim he strongly disputes.
Jamieson first raised many of these concerns in a similar article published in an ISLA report several years ago where went on to predict global assets under management (AuM) in ETFs would grow rapidly and suggested the securities lending market should act quickly to make the most of the opportunities this would afford.
With global AuM now over $7 trillion, and Europe comfortably smashing through the $1 trillion mark for the first time ($1.28 trillion by the end of 2020), volumes have exploded, Jamieson explains.
However, with the global AuM forecast to hit $12 trillion in the next few years, ETF numbers on-loan or pledged as collateral are “still modest at best”, he notes
In 2021, ETFs are far from a novel feature in the securities financing market and Jamieson says now is the time to address lingering issues and fully embrace this fund-type and all it can offer a market crying out for high-quality collateral sources and greater yields.
IHS Markit data shows an increase in visible availability in Europe of nearly 40 per cent from just under $50 billion to almost $70 billion over the past three years.
Meanwhile, on-loan balances, while “more volatile”, have increased 30 per cent from around $4 billion to more than $5.2 billion and peaked as high as $8.5 billion during the COVID-19 inspired period of volatility in early-2020, he says.
Jamieson argues this illustrates the increasing adoption of ETFs as a macro-hedging tool in addition to a core long holding, which is a trend the financing market should be cognisant of.
“The desire to pledge ETFs as collateral, particularly in relation to the evolving regulatory environment, is as strong as ever, and put simply, if more and more clients hold them (and in increasing quantities) the need for greater acceptance as a collateral instrument in their own right will only increase,” he writes.
Greater transparency, gleaned from regulatory reporting frameworks, coupled with “inherent in-built diversification make ETFs an ideal collateral instrument regardless of some of the current hurdles in understanding,” he concludes.
Moreover, the securities lending world has something to offer the ETF space in return.
“We have already witnessed this in the US, where an active options market (in particular high-yield fixed income ETFs) has driven demand to nearly 100 per cent utilisation in certain names and generated significant fee income,” Jamieson explains, adding that there are now over 350 ETFs globally where the annualised average lending revenue outweighs the cost of the ETF management fee — “a substantial improvement from 2018 when there were 150 such products”.
As such, Jamieson argues, what has become “evident over the last couple of years is the continuing lack of ‘ownership’ within the securities finance industry itself”.
He continues: “Now is the time for industry practitioners to rise to the challenge, and to resource and prioritise this opportunity appropriately. This is particularly relevant when so many of the industry’s heavyweights generate so much revenue from the product itself.”
Now read: IHS Markit enhances ETF collateral lists
Writing in the latest International Securities Lending Association (ISLA) quarterly report, Jamieson is calling on major players straddling the securities lending and ETF markets to take ownership of the challenges standing between greater use of these funds. To date, he says, the mission has mainly been led by “a small band of enthusiasts” hailing from the ETF space, rather than within the securities lending community.
“Illustrious names in securities finance such as State Street, Bank of New York, Brown Brothers Harriman, Northern Trust, BlackRock and J.P. Morgan — to name but half a dozen — are also the top names in the ETF industry, either as issuers or custodians, and often both. It cannot surely be too long before their clients and their colleagues become more vocal to the missed opportunities?” he writes.
Borrow demand for ETF shares and overall lendable availability have trended upwards over the past three year by what at first glance appears to be a good clip. But both these growth rates pale in comparison to the overall inflows into ETFs over the same period, which suggests there is much more to do.
According to Jamieson, greater acceptance is hampered by known “impediments” including “nomenclature challenges, multiple sedols (due to cross-listings), classification confusion (is it an equity, is it fixed income?)”.
He also argues ETFs have a perception problem among European institutional investors who see it as solely a retail product — a claim he strongly disputes.
Jamieson first raised many of these concerns in a similar article published in an ISLA report several years ago where went on to predict global assets under management (AuM) in ETFs would grow rapidly and suggested the securities lending market should act quickly to make the most of the opportunities this would afford.
With global AuM now over $7 trillion, and Europe comfortably smashing through the $1 trillion mark for the first time ($1.28 trillion by the end of 2020), volumes have exploded, Jamieson explains.
However, with the global AuM forecast to hit $12 trillion in the next few years, ETF numbers on-loan or pledged as collateral are “still modest at best”, he notes
In 2021, ETFs are far from a novel feature in the securities financing market and Jamieson says now is the time to address lingering issues and fully embrace this fund-type and all it can offer a market crying out for high-quality collateral sources and greater yields.
IHS Markit data shows an increase in visible availability in Europe of nearly 40 per cent from just under $50 billion to almost $70 billion over the past three years.
Meanwhile, on-loan balances, while “more volatile”, have increased 30 per cent from around $4 billion to more than $5.2 billion and peaked as high as $8.5 billion during the COVID-19 inspired period of volatility in early-2020, he says.
Jamieson argues this illustrates the increasing adoption of ETFs as a macro-hedging tool in addition to a core long holding, which is a trend the financing market should be cognisant of.
“The desire to pledge ETFs as collateral, particularly in relation to the evolving regulatory environment, is as strong as ever, and put simply, if more and more clients hold them (and in increasing quantities) the need for greater acceptance as a collateral instrument in their own right will only increase,” he writes.
Greater transparency, gleaned from regulatory reporting frameworks, coupled with “inherent in-built diversification make ETFs an ideal collateral instrument regardless of some of the current hurdles in understanding,” he concludes.
Moreover, the securities lending world has something to offer the ETF space in return.
“We have already witnessed this in the US, where an active options market (in particular high-yield fixed income ETFs) has driven demand to nearly 100 per cent utilisation in certain names and generated significant fee income,” Jamieson explains, adding that there are now over 350 ETFs globally where the annualised average lending revenue outweighs the cost of the ETF management fee — “a substantial improvement from 2018 when there were 150 such products”.
As such, Jamieson argues, what has become “evident over the last couple of years is the continuing lack of ‘ownership’ within the securities finance industry itself”.
He continues: “Now is the time for industry practitioners to rise to the challenge, and to resource and prioritise this opportunity appropriately. This is particularly relevant when so many of the industry’s heavyweights generate so much revenue from the product itself.”
Now read: IHS Markit enhances ETF collateral lists
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