iShares has published a brochure detailing securities lending on its ETF platform in an effort to increase transparency on the strategy.
The document, available on the company's website, contains an overview of the practice, as well as details of the iShares funds that generated significant lending revenue last year and a table of the firm's top borrowers.
iShares director Stefan Kaiser says: "This data will be updated on a quarterly basis; in terms of refreshing the brochure, that will probably happen on a quarterly basis, but it may be semi-annual depending on client demand."
The first release reveals that securities lending on the iShares MSCI Turkey returned the most revenue of any individual iShares ETF, generating 93 basis points in the twelve months up to October 2010. In all, 14 iShares funds in the EMEA region earned over 15 bps across this period.
Securities lending carries the risk that the counterparty defaults on its commitments. If the value of collateral fails to cover the costs of repurchasing the securities, the fund will have to pay out money to buy them back. With over $1.9trn worth of assets on loan on a daily basis according to Data Explorers analysis though, it is big business.
iShares uses an independent risk and quantitative Analysis group to assess potential borrowers and define conservative collateral parameters. Kaiser says: "We don't lend to hedge funds for example, we only lend to high quality borrowers."
Securities lending has both local and broad implications. Kaiser says: "The first point to make is that securities lending is beneficial for financial markets in general - although that itself comes back to our clients. The second is that we believe it is a low risk activity that at the same time provides returns for our clients."
Securities lending allows borrowers to short sell the borrowed security, which iShares says can improve liquidity and drive efficient pricing. Kaiser adds: "The fact that a market maker can hedge its position helps it give competitive spreads to clients; if it was not able to do this, spreads could widen."
At iShares, 60% of the revenues gained from securities lending on the holdings of ETFs are passed back to the fund. This can have a significant impact on the cost of ownership of a fund, as these returns are not factored into the headline expense ratio.
Seucrities lending on the iShares Eurostoxx 50 last year, for example, generated returns of 28 bps for the fund. With the total expense ratio only slightly higher at 35 bps, these figures can make a sizeable difference to costs.
Kaiser says: "We feel that it is best if we disclose to clients the 35bps - in this example - we take from the fund, and then separately the securities lending revenue we give back. The client has transparency: they know exactly what they're paying, and exactly what they're getting back."
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