Joint Working Group ETF Processing

Transcription

1 Joint Working Group ETF Processing Sander van Nugteren 16 March

2 Industry Growth has been strong. Europe ETP Assets & Number of ETPs by Year 1 Assets ($bn) # of ETPs Jan However distributing ETFs across multiple exchanges and trading facilities presents challenges The Joint Working Group ETF Processing group Identified legal obstacles Developed best market practises for ETF processing Proposed measures to increase liquidity of ETFs 1 Source: Blackrock Global ETP Landscape January

3 ETF Primary Market Authorised Participants are the only entities able to create and redeem ETFs Units in the Primary Markets These entities tend to be made up of Investment Banks, Regional Banks and Proprietary Trading houses In order to make the process of creating and redeeming ETF units more efficient the Working Group proposed the following steps: ETF issuers to utilise online order taking platforms Implementation of a settlement description field as part of their core static data Portfolio Composition Files and Net Asset Value files should be made available before the market open Details of Primary Market Activity should be available before 10:30am after the dealing day ETF Secondary Market More to do.. The group came to the consensus that harmonizing Central Counterparty rules such as Margin Requirements and Trade netting models will be difficult. Regulatory initiatives will however harmonise buy-in regimes across Europe

4 Financing ETF Securities Lending: The benefits of a Securities Lending market for ETF units: A source of revenue for long holders of ETFs units. Improved liquidity by increasing the number of market participants. Liquidity providers can manage short positions more efficiently without having to access the primary market. It is supportive of the establishment of an Options market through efficient hedging Improved settlement rates Collateral Acceptability: Demand for collateral is growing ETFs are accepted by a growing number of finance counterparties An Index Provider (Markit) is has launched several ETF Collateral Lists as a solution for classification and risk approval for ETFs Eurex allow a subset of ETFs as margin collateral with a view to expanding this list on client demand

5 What can Market Participants do to effect positive change? Custodians and end investors: Scrutinise custody holdings and engage clients to lend ETF assets to increase the Lending pool inventory. Identifying and removing barriers to lending ETFs Include ETFs as collateral and adopting Markit ETF Collateral Lists CCPs: Include ETFs as collateral and adopt Markit ETF Collateral Lists Issuers: Lobbying of Securities Finance relationships on the adoption of ETFs as collateral Highlight lending revenue opportunity to beneficial owners and engage custodians and Lending agents Brokers: Ensure Prime Brokers are aware of short demand that is beyond typical fail coverage this essential to normalise fees and introduce competitive fees Brokers should be challenging funding rates for ETFs (fundability is improving)

6 Post Trade Transparency: European ETFs are not currently MIFID instruments and there is no requirement to print over-thecounter trades. It is estimated that between a half and 2/3 rd of ETF trade volumes go unreported. This provides a misleading picture of overall ETF liquidity. In 2018 ETFs will become MIFID instruments. In the meantime Investors can encourage Brokers to report volumes

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8 ETF realignments European ETFs are traded on multiple trading venues which each have their own CSD for settlement. This multi-listing is requiring frequent re-alignments between those settlement venues that are unfortunately more challenging than what we would hope. The working group has recommended best practices to help on those realignments. This covers both information standards that should be made available to participants as well as processing standards that should be respected. In reality though, a lot of the hassle is directly linked to the issuance model adopted 17 March

9 ETF issuance ETF issuance refers to the CSD or ICSD where the ETF is brought by the issuer. The place of issuance will determine the ease of transfer to the CSDs associated with the trading venues Typically, Irish ETFs are issued in Euroclear UK&Irland while Lux ETFs are issued in Clearstream Francfort or Euroclear France. More recently ETFs have been issued in ICSDs - Euroclear Brussels and Clearstream Luxembourg (or Clearstream Francfort international ) The difficulties are summarized in the following matrix Example footnote 17 March

10 Links overview Bridge T2S for EUR Investor CSD Issuer CSD EUI Euroclear UK & Ireland EOC Euroclear Bank CBL Clearstream Luxembourg (Incl. CBFi) CBF Clearstream Germany ESES Euroclear (incl. France and Netherlands) MT Monte Titoli IBER CLEAR SIS SIX SIS EUI EOC CBL LuxCSD CBF EFR 17 March

11 Perspective The main difficulty is to bring EUI issued ETFs in CBF This is because of the Collective Safe Custody regime that does not recognizes position held in EUI. Current solutions are to issue either directly in ICSD or in a compatible domestic CSD. The working group has determined that the T2S initiative opens an opportunity to remove the operational consequence of it, and the CSDR will not help. The working group has also encouraged the authorities to address the legal concerns to completely eliminate the problem (Securities Law directive Existing law interpretation). 17 March