Markit backs ETFs as lending collateral

ETF tradingMarkit, a financial data provider, has launched a service designed to further the role of exchange-traded funds (ETFs) as a form of collateral in securities lending.

The firm has launched ‘Markit ETF collateral lists’, which initially tracks over $516 billion (€466 billion) of developed-market equity and fixed income ETFs that contain assets that meet widely accepted collateral rules.

In a paper called ETFs and the collateral conundrum, Simon Colvin, an analyst at Markit, writes that while the majority of the assets that currently meet the criteria of the Markit ETF collateral lists are listed in North America, the rules also have relevance for European ETF investors, as the equity and fixed income collateral lists have identified $75 billion of assets that meet the criteria.

The largest European listed ETF that currently meets the criteria is the iShares Dax Ucits ETF index, the largest fund with over $10 billion of assets under management.

The lists have screened out certain funds, such as those that are subscale.

Colvin says that despite their ability to hold many of the required attributes to classify as high quality collateral, many market participants don’t accept ETFs as securities lending collateral.

The value of ETF assets in lending programmes has remained flat at $140 billion in the last 18 months, he notes.

At a recent Markit securities finance forum held in London, over 55% of polled delegates stated that they didn’t accept or post exchange-traded products as collateral.

Colvin says failure to accept assets held in ETFs as collateral comes at a time when high quality collateral “has arguably never been as scarce in the financial industry”.

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