Tag Archives: sec lending


MiFID II Fuels Massive EU Move Towards ETFs, ETF Options, Sec Lending

MiFID II Implementation Triggers Flow of $50b into Europe ETF Market In First Weeks of 2018; ETF Sec Lending and  ETF Options Growth Expected to Drive EU Financial Markets.

“What we’ve seen for the first time in European ETF trading is really a concerted interest in trading ETF options in Europe. A load of clients use ETF options in the States, but in 2018 — and it’s a culmination of MiFID II (and other factors) — I think there is an acceptance that this is now a practical and attractive proposal for people who want to trade volatility, buy protection or raise income by selling options. That’s really unlocking a whole new dimension in the way end-investors can use ETFs,”

Twenty-five years ago, when SPDR, the original Exchange-Traded Fund (ETF) was christened on the American Stock Exchange with the nickname “Spiders”, this MarketsMuse senior curator was one of the first market-makers on the Amex to trade the ‘new-fangled’ product.  Along with a cadre of other professional traders and floor brokers from that time, we’re now viewed as the original cast of The ETF Story.  A quarter of a century later, ETFs represent $3trillion in assets; a number that some expect to double in size in just a few more years.  Across the US financial market ecosystem, the ETF evolution has transformed investment strategy schemes on the part of retail and institutional investors within the context of equity, fixed income, commodities and derivatives market investment styles. And with the January 2018 implementation of  The Markets in Financial Instruments Directive II (MiFID II), few will dispute that Europe is on the cusp of realizing a massive asset allocation transformation to ETF constructs, as the benefits to investors and industry participants cannot be understated.

Slawomir Rzeszotko, Jane Street
Slawomir Rzeszotko, Jane Street

“Best execution and post-trade transparency are two areas where MiFID II seems to have had an impact on ETF trading,” said Slawomir Rzeszotko, head of institutional sales and trading, Europe, at quantitative trading firm, global liquidity provider and market maker Jane Street Group LLC in London. “In both cases, the changes appear to have encouraged institutional investors to execute more trades via (request for quote platforms).”

For those who are still unclear as to the value proposition of utilizing exchange-traded funds, let us the count the ways, starting with the ability to deploy assets based on investment theme (e.g. industry or index of specific types of stocks or bonds) via an instrument that trades just like a stock in terms of transparency, liquidity and low cost commissions. There’s a host of reasons why retail investors are generally better served to use ETFs vs. Mutual Funds. Let’s not overlook Warren Buffett’s view that index investing is a smarter approach for individual investors. For institutional investors, the list of reasons to embrace ETFs has become equally compelling. We won’t provide a tutorial if you haven’t gotten the memo yet, we’ll simply point you to the text book explanation.  It’s taken a long time for institutional investors in the U.S. to ‘get the joke’, now its time for European ETF Issuers to ramp up the education and awareness process aimed at institutional investors. Here’s a few hints as to how MiFID II implementation is going to benefit those charged with overseeing institutional portfolios, pension assets and end retail clients:

  1. Greater Transparency (which delivers Greater Liquidity)
  2. Lower Cost to Execute (vs mutual funds)
  3. Ability to allocate to specific themes
  4. Portfolio Transition Ease
  5. Securities Lending (Sec Lending) Opportunities (more income to funds that hold ETFs)
  6. Introduction of Options on ETFs–to enable hedging and portfolio optimization schemes.

“When volumes and trading hit a certain critical point, the acceptability of any of those things that trade as collateral becomes more feasible.” The look-through liquidity afforded by the MiFID II rules means “we’re at a tipping point where ETFs themselves are being recognized increasingly as something that can be used in the world of lending. It means the borrow market in ETFs in Europe is moving toward where it is in the States.. A good “borrow” or securities lending market also lends itself to a “functional options market..”

We’ll leave the lengthier explanation to P&I’s Sophie Baker–who put forth a superb dissertation in the Feb 19 2018 edition of Pensions & Investments Magazine titled “Europe in line for ETF boom, thanks to MiFID II”.  MarketsMuse ETF curators also extends a big shout out to “Dame Deborah Fuhr”, who is viewed by most across ETF land as the “Queen of ETFs”.  Her Eminence Dame Deborah is an industry icon and founder of research platform and industry think tank ETFGI. When it comes to objectively framing the ETF value proposition within the European theater, nobody does it better–so we think you should follow her on Twitter.

If you’ve got a hot insider tip, a bright idea, or if you’d like to get visibility for your brand through MarketsMuse via subliminal content marketing, advertorial, blatant shout-out, spotlight article, news release etc., please reach out to our Senior Editor  or email: cmo@marketsmuse.com.




Sec Lending Makes These ETFs Profitable

Its all about Securities Lending aka Sec Lending for certain ETFs to outperform and be profitable for investors looking for ways to offset the fund’s expense fees. MarketsMuse salutes Eric Balchunas at Bloomberg for his a.m. report: “Hedge Funds Will Pay for You to Own Small-Cap ETFs”

(Bloomberg)- With many exchange-traded funds already dirt cheap, everyone is waiting for the first free ETF. Turns out, it’s already here.

In certain pockets of the industry, ETFs are consistently beating the return on the indexes they’re meant to track. Theoretically, an ETF should lag its index by roughly the amount of its fee to investors. But that doesn’t account for revenue from securities lending. ETFs can lend out as much as 33 percent1 of their equity holdings to short sellers in return for a small fee. ETFs can then use that revenue to offset the expense ratio.

In some cases, an ETF has securities in its portfolio that are in such high demand from short sellers that the lending fees add up to more than the fund’s expense ratio—so the ETF not only makes up its fees but also pushes returns above those of the index.

The most prominent examples of this phenomenon are in ETFs that track small-cap indexes. State Street Corp., BlackRock Inc.’s iShares, and Vanguard Group Inc. all have small-cap ETFs—with more than $30 billion in collective assets—whose the extra revenue from securities lending leads to returns that top those of the indexes they track.

Read Eric’s story via this link


ETF Sec Lending: Red Flags Being Raised

Sec Lending is a big business for Wall Street and through the big banks, institutional investors are lending out more bonds and accepting increasing amounts of non-cash securities — including exchange traded funds — as collateral, according to a recent report spotlighted by MarketsMuse editors courtesy of a.m. story from FT.com. But the practice is raising concerns among some investors some of whom are particularly concerned about the practice of ETFs accepting other ETFs as collateral.

The trends for more bond lending and less cash collateral were picked up in the latest report from the International Securities Lending Association (ISLA), published on August 27. It said the €1.8tn securities lending industry had continued to move towards sovereign debt, with 39 per cent of securities on loan being made up of government debt, up from 35 per cent a year earlier. Of the €718bn worth of government bonds on loan, 72 per cent is taken in return for non-cash collateral, up from 61 per cent 12 months before.

Among those institutions feeding the increased desire to borrow securities is iShares, the world’s largest ETF provider in terms of assets under management, which is owned by BlackRock. It recently scrapped the 50 per cent limit on securities lending for ETFs domiciled in Europe that it had imposed in 2012.

In a statement published in July, iShares said it had decided to scrap the limit to “ensure clients can benefit from additional securities lending returns in funds where there is more borrowing demand”.

But scrutiny of just one US Treasuries ETF reveals some decisions — over collateral — that investors might find surprising. In the 12 months to the end of June 2015, the $1.8bn iShares $ Treasury Bond 7-10yr Ucits ETF (IBTM), had lent out on average 47.48 per cent of its assets under management, generating a 12 month return of 0.09 per cent.

iShares’ online information about this fund states that acceptable collateral includes “selected ETF units”, which last week included 10 iShares ETFs, including ones tracking US property and Chinese and Australian equities.

Andrew Jamieson, global head of broker dealer relationships for iShares, insists the policy of using ETFs as collateral is “nothing new” and that ETFs “are a viable and liquid collateral type as part of a broad range of assets that you can use”.

Ben Seager-Scott, director, investment strategy at Tilney Bestinvest, says he is “deeply concerned” by the securities lending programme at iShares and accused the provider of poor communication.

There’s no conflict of interest and there’s no cannibalisation

And Peter Sleep, senior portfolio manager at Seven Investment Management, questions iShares’ use of a Chinese equity ETF as collateral in a government bond fund. “What happens if you have a China ETF? Maybe it’s liquid, maybe it isn’t. What happens if China suspends trading on its stock market again?”

For the full story from FT.com, please click here

Sec Lending and ETFs: Reading Between The [Disclosure] Lines; A Good Primer

morningstarExtract courtesy of Morningstar/ Abby Woodham reporter

“..A well-run index fund is typically characterized by its ability to effectively track its index, lagging only by the amount of its expense ratio. In theory, it should not be possible for an index fund to come any closer to its benchmark’s return–but some do, including funds that utilize full replication of their index’s holdings. A handful of funds even beat their benchmark while perfectly replicating its holdings. How can this be? In many cases, this is an example of securities lending at work…”

“..Mining for Data
There are a handful of ways to get more information on the securities-lending practices of the ETFs in your portfolio. If you notice that your ETF (which is employing full replication) lags its benchmark by less than its expense ratio, it may be an indication that the fund is engaged in securities lending. Morningstar also publishes a calculation called the “estimated holding cost” that directly measures the performance of a fund relative to its benchmark over the past year. There’s a good chance that an ETF with an estimated holding cost that is lower than its expense ratio is also engaged in securities lending.”

For the full article (which necessarily incorporates subliminal promotion of products/services delivered by the ‘masthead’, please click here