Joint Working Group ETF Processing Sander van Nugteren 16 March 2017 20170314-123131-335422
Industry Growth has been strong. Europe ETP Assets & Number of ETPs by Year 1 Assets ($bn) # of ETPs 600 500 1.593 1.893 2.105 2.167 2.257 2.343 2.339 2.343 2.500 2.000 400 300 1.108 565 586 1.500 200 100 0 6 71 118 104 115 167 20 35 305 56 92 133 503 854 150 243 315 299 367 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan 17 414 458 506 1.000 500 0 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 2017 20170314-123131-335422 2
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. 20170314-123131-335422 3
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 20170314-123131-335422 4
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) 20170314-123131-335422 5
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. 20170314-123131-335422 6
Disclaimers REGULATORY INFORMATION BlackRock Advisors (UK) Limited is authorised and regulated by the Financial Conduct Authority ('FCA'), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000. This document has been provided by BlackRock in a private and confidential manner to professional and or institutional investors (as such term is defined according to applicable regulations in the relevant jurisdiction) only upon express request. This document is solely for informational and educational purposes only and represents an assessment of the market environment at a specific time and is not intended to be relied upon by the reader as research, a forecast of future events or a guarantee of future results. This publication does not provide financial, investment or tax advice or information relating to the securities of any particular fund or other issuer. The information and opinions included in this publication are based on publicly available information, are subject to change and should not be relied upon for any purpose other than general information and education. This publication has been prepared without regard to the individual financial circumstances and objectives of those who receive it and the types of securities discussed in this publication may not be suitable for all investors. The information included in this document has been taken from trade and other sources considered to be reliable. This document is published in good faith but no representation or warranty, express or implied, is made by BlackRock or by any person as to its accuracy or completeness and it should not be relied on as such. BlackRock or any of its directors, officers, employees or agents shall have no liability for any loss or damage arising out of the use or reliance on the material provided including without limitation, any loss of profit or any other damage, direct or consequential. Any opinions expressed in this document reflect our analysis at this date and are subject to change. This is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy in any jurisdiction. This document has not been prepared, reviewed or distributed by any broker-dealer affiliate of BlackRock and should not be deemed a product of any such affiliate. BlackRock has not performed any due diligence on products which are not managed by BlackRock and accordingly does not make any remark on their suitability for investment purposes. Past performance is not a guide to future performance. Income is not fixed and may fluctuate. Exposure to foreign currencies can be affected by exchange rate movements. This document or any portion hereof may not be reprinted, sold or redistributed without authorisation from BlackRock Advisors (UK) or its affiliates (together, BlackRock ). 20170314-123131-335422 7
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 2017 1
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 2017 2
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 2017 3
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 2017 4