Moody's gets negative over ESMA guidelines
30 July 2012 Paris
Image: Shutterstock
The European Securities and Markets Authority’s UCITS guidelines are “credit negative for asset managers”, according to the ratings agency Moody’s.
The guidelines were developed following a review of the current regulatory regime in Europe. ESMA found it to be “insufficient to address the specific features and risks associated with” index-tracking UCITS and UCITS exchange-traded funds (ETFs) and the efficient portfolio management (EPM) techniques, such as securities lending, repo and reverse repo, that they may carry out.
In a statement, ESMA added: “[T]hese guidelines are a valuable response to many of the issues identified in the on-going debate on shadow banking and will constitute and important step in the development of the regulatory framework of UCITS.”
Some commentators have said that under the guidelines all revenue that is made from securities lending must be returned to a UCITS fund and its investors.
Moody’s said that while the guidelines aim to increase investor protection and harmonise regulatory requirements within the EU, they are credit negative for asset managers that sponsor ETFs in Europe, such as BlackRock and State Street, and will hurt profitability as a result of higher compliance costs and curtailment of their profitable securities lending activities.
It said: “Securities lending provides ETF sponsors extra revenue to compensate for slim ETF management fees.”
The guidelines, which Moody’s does not expect to be implemented until early next year, will force ETF sponsors to return securities lending revenue. “[A]ll securities lending revenues, net of operating costs, must be returned to the ETF to compensate investors for assuming the associated counterparty risk.”
The International Securities Lending Association (ISLA) has questioned this. ESMA’s guidelines state: “All the revenues arising from efficient portfolio management techniques, net of direct and indirect operational costs, should be returned to the UCITS.”
In a statement, ISLA said: “This last sentence has been the subject of some press speculation which we think is exaggerated. Whilst the wording is not as clear as we would like, we assume that it is not ESMA's intention to preclude a securities lending agent (which could be the fund manager, custodian bank or a third party firm) from charging a commercially appropriate fee for providing their services.”
“We are in the process of trying to get more clarity on this part of the guidance and will be in touch with members on this point in due course.”
An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.
Moody’s explained that ETF sponsors share securities revenue differently: “While some ETF sponsors, such as Comstage and Credit Suisse Group AG’s Credit Suisse Asset Management, already return 100 percent of securities lending fee income to fund investors, others retain a percentage of the fee income for themselves. Some sponsors, such as EasyETF and SPDR ETF, keep up to 50 percent of the revenue.”
The guidelines were developed following a review of the current regulatory regime in Europe. ESMA found it to be “insufficient to address the specific features and risks associated with” index-tracking UCITS and UCITS exchange-traded funds (ETFs) and the efficient portfolio management (EPM) techniques, such as securities lending, repo and reverse repo, that they may carry out.
In a statement, ESMA added: “[T]hese guidelines are a valuable response to many of the issues identified in the on-going debate on shadow banking and will constitute and important step in the development of the regulatory framework of UCITS.”
Some commentators have said that under the guidelines all revenue that is made from securities lending must be returned to a UCITS fund and its investors.
Moody’s said that while the guidelines aim to increase investor protection and harmonise regulatory requirements within the EU, they are credit negative for asset managers that sponsor ETFs in Europe, such as BlackRock and State Street, and will hurt profitability as a result of higher compliance costs and curtailment of their profitable securities lending activities.
It said: “Securities lending provides ETF sponsors extra revenue to compensate for slim ETF management fees.”
The guidelines, which Moody’s does not expect to be implemented until early next year, will force ETF sponsors to return securities lending revenue. “[A]ll securities lending revenues, net of operating costs, must be returned to the ETF to compensate investors for assuming the associated counterparty risk.”
The International Securities Lending Association (ISLA) has questioned this. ESMA’s guidelines state: “All the revenues arising from efficient portfolio management techniques, net of direct and indirect operational costs, should be returned to the UCITS.”
In a statement, ISLA said: “This last sentence has been the subject of some press speculation which we think is exaggerated. Whilst the wording is not as clear as we would like, we assume that it is not ESMA's intention to preclude a securities lending agent (which could be the fund manager, custodian bank or a third party firm) from charging a commercially appropriate fee for providing their services.”
“We are in the process of trying to get more clarity on this part of the guidance and will be in touch with members on this point in due course.”
An ESMA spokesperson confirmed that all net revenue must be returned, but this does not include the cost of running a securities lending programme.
Moody’s explained that ETF sponsors share securities revenue differently: “While some ETF sponsors, such as Comstage and Credit Suisse Group AG’s Credit Suisse Asset Management, already return 100 percent of securities lending fee income to fund investors, others retain a percentage of the fee income for themselves. Some sponsors, such as EasyETF and SPDR ETF, keep up to 50 percent of the revenue.”
NO FEE, NO RISK
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