ETF guidelines rule on lending revenues

gavellaw booksGuidelines for practices within the exchange-traded funds (ETFs) sector require revenue from securities lending to be returned to the fund.

The guidelines were released this week by the European Securities and Markets Authority (ESMA) after a consultation exercise about the regulatory regime in which ETFs and certain other Ucits funds operate, with an emphasis on the use of ‘efficient portfolio management’ techniques, such as securities lending.

ESMA said the exercise showed that existing regulations were not sufficient to take account of specific features and risks associated with these types of funds and practices.

ESMA stopped short of limiting the amount of a portfolio that can be put on loan, but it did say securities on loan should be instantly recallable.

Securities lending applies to physically constructed ETFs, though other guidelines affect those that replicate indices using over-the-counter (OTC) swaps. For example, collateral for mitigating counterparty risk from OTC financial derivative transactions should comply with “very strict” qualitative criteria and specific limits in relation to diversification.

Steven Maijoor, ESMA chair, said the guidelines were aimed at strengthening investor protection.

Joe Linhares, head of iShares in Europe, the Middle East and Africa at BlackRock’s iShare’s business, said the guidelines were a positive step towards investor understanding of risks but that various guidelines should apply also to other exchange-trade products.

©2012 funds europe