Mark Twain allegedly said: "A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain."
What Twain fails to mention is that a banker generally wants replacement cover in the meantime, just in case unexpected torrential rain hits and the borrower is unable to return the umbrella.
When ETF providers lend out the securities underlying their funds, they require collateral as a form of cover, to protect against the possibility of the borrower going under and therefore failing to return the stock. However, the amount of securities lent out, the type and level of collateral posted in place and the revenue put back into the ETF differs across funds and among issuers.
The problem does not lie in the differences in lending activity, but rather, the lack of transparency over all the factors involved in this practice. Finding out all the securities lending details is not an entirely simple or speedy process. This is now starting to contrast some of the prospectuses released on swap-based ETFs and the level of information they provide.
As the industry moves towards promoting transparency in relation to swap-based and multi-counterparty funds, it needs to ensure standards are improved in disclosing securities lending activities for physically replicated funds to remain a simple and core proposition.
Such transparency will also help investors select funds and understand the risks involved, especially on those rainy days when the banker may need the umbrella back.
Emma Dunkley, Editor [email protected]
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