Industry leaders in agreement to improve ETF collateral practices

Dec 7th, 2015 | By | Category: ETF and Index News

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Markit, a leading global provider of financial information services, has announced that key participants in the exchange-traded fund industry; namely, BlackRock, BNY Mellon and State Street, have accepted Markit’s ETF collateral lists for inclusion in their collateral management schedules.

Industry leaders in agreement to improve ETF collateral practices

BlackRock, BNY Mellon and State Street (pictured) have accepted Markit’s ETF collateral list.

Markit’s collateral lists support securities lending professionals in identifying which equity and fixed income ETFs to accept or post as collateral. The lists are derived using standardised filtering criteria, including geographic exposure, holding type and assets under management.

Despite holding many characteristics which would classify them as high-quality collateral, many market participants don’t accept ETFs due to the inadequacy of the liquidity and diversification tests employed in analysing the unique ETF structure. For example, tests which look at an ETF’s on-exchange trading volumes to determine it’s liquidity overlook the liquidity of the fund’s underlying securities. This can be exploited through the ETF creation and redemption process and results in a far greater level of potential liquidity than ETF trading volumes would imply.

“A lack of standardised criteria, market opacity and the onerous management process for risk departments mean that many market participants have historically not accepted ETFs as collateral. Our lists aim to bring transparency and simplicity to the market, facilitating access to ETFs for use as collateral,” said Pierre Khemdoudi, managing director of securities finance at Markit.

The Markit ETF collateral lists provide market participants with easily referenced lists of equity and fixed income ETFs that meet generally acceptable criteria for use as collateral. “Removing the need to assess the viability of ETFs individually, and instead analysing a broader set of common attributes, is a much more dynamic and robust model for lenders, borrowers and triparty agents alike. We are very supportive of the efforts Markit has made to date and feel this user-friendly solution will benefit market participants and investors,” said Tim McLeod, director of securities lending and finance at BlackRock.

The demand for collateral is increasing due to regulations such as MiFID II and Dodd-Frank which require additional margins to be posted in derivatives transactions. Improving the use of ETFs as collateral has the potential to reduce fees, increase liquidity and reduce bid-offer spreads in the marketplace.

Maurice Leo, senior managing director, securities finance at State Street, said:  “We believe Markit’s ETF collateral lists should facilitate greater adoption of ETFs as collateral by creating a recognised universe of ETFs that streamline trade execution and the collateral management processes for all parties. These equity and fixed income lists will extend the universe of ETFs that State Street has historically accepted under its risk management policy.”

Markit applies a seven-tier filter to more than 6,000 global exchange traded products (ETPs) to create lists of equity and fixed income funds that meet generally acceptable criteria for use as collateral. Market participants can easily reference these lists in collateral schedules, streamlining assessments of fund characteristics and simplifying reviews of collateral eligibility by risk departments.

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