ETF Securities has criticised iShares' proposals to rename some commodities products but says that if ETPS are re-labelled, physically-backed ETFs which lend securities should be in the same category as swap-backed products.
In its due diligence campaign for the European market, launched on 17 October, iShares said that ETCs which are not physically-backed should be re-branded as ETNs.
It re-iterated these views a few days later in its testimony prepared ahead of a US Senate hearing on ETFs.
iShares argues that it wants to be clear where there is structural risk in an instrument in addition to market risk.
Towsend Lansing, head of regulatory affairs at ETF Securities, the world's largest ETC provider, disagrees with iShares' proposals and argues that if a known classification is changed investors will ask why.
"I think overall their proposal in respect of ETCs is a solution looking for a problem. We don't think there is any confusion among investors," he says.
If there is a re-classification of structures, he says it would be better to draw that distinction across physically-backed, collateralised and uncollateralised products. "Those are questions that investors do have," he says.
"If you look at classifications which best help investors in terms of clarifying credit risk, you could look at a product which has its assets held in a limited recourse, segregated account for which there is no securities lending or yield enhancement i.e. no credit risk arises.
"Then you would have collateralised assets, which include physically-replicated ETFs that lend out assets or use optimised sampling and you would also have your swap-backed products which are collateralised."
The third category of un-collateralised products would include ETNs and structured products, he says.
He says that if iShares creates a physically-backed Eurostoxx 50 ETF and buys all 50 stocks, if it lends the stocks out and collateralises the stock lending with something that is not in the Eurostoxx 50 "that is no different in terms of credit risk to a swap-backed platform which has exposure to counterparties but uses collateral to offset it".
iShares says that ETCs which are not backed by physical assets would be in the same category as ETNs, however, Lansing disputes the fact that they should be looked at together: "ETNS are much more like structured products, they are off bank balance sheets, and ETCs aren't like that.
"From a credit risk perspective there is no reason they would be grouped together."
He also argues that in the US, where iShares also wants product re-labelling to occur, ETCs are not structured as debt instruments; they are grantor trusts, which are issued like equity instruments.
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