I do a lot of travelling, particularly back and forth across Europe. There is an irony here. Much of what I do is to explain the benefits of Euroclear’s international structure for ETFs, which centralises the securities in an ICSD. Funnily enough, the more the industry centralises the more time I spend running around Europe.
Many of my conversations centre around the problems traders and dealers face when trading cross-listing of ETFs in multiple markets. It’s almost always the same story. Everyone talks about removing the huge frictional costs associated to settling the ETFs in the local CSD as well as the effort to realign positions between CSDs.
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.
By contrast, the international structure that I have worked on with a number of issuers, such as iShares and SPDR, concentrates liquidity in one place. As a result, agency lenders are starting to get serious about lending ETFs. 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.
It is proving a boon (another one of those English words that I am bemused by) to institutional holders, prime clearers and agency lenders by making it easier to use ETFs as a financing tool, both for securities lending and collateral management.
Loan balances are certainly rising, though there are fluctuations according to market activity.
There is still an education job to be done on beneficial owners. 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.
Education can be a slow process – as I am frequently reminded when confronted with my children’s homework. But it is always a good investment, whatever the air miles involved.