Citi makes landmark move to accept ETFs as collateral

Citi’s plans to go live with a fund administration service for European exchange traded funds (ETF) in 2018.

Citi has made a move to accept exchange traded funds (ETFs) as collateral in agency securities lending transactions.

With regulatory developments such as MiFID II coming into force though, European institutional investors are constantly looking for ways to grow and diversify their pools of collateral to meet increasing margin requirements.

With over $4.9 trillion in global assets under management, ETF products are ripe for use in the securities lending space, though this has mostly only been utilised in the US. 

Citi’s move will see it use Markit’s IHS collateral lists to identify eligible ETF instruments in both in equity and fixed income, to help its clients optimise collateral management by accessing a wider range of funds. 

“As the ETF industry continues to mature with increased levels of supply coupled with greater transparency enabled by recent regulatory requirements, beneficial owners and borrowers can benefit from the liquidity and portfolio diversification offered by  ETFs  while retaining sufficient levels of transparency and efficiency required to maintain high-quality collateral,” said David Martocci, global head of agency securities lending at Citi.

The move comes just over two years after BlackRock, BNY Mellon and State Street agreed to accept Markit’s ETF collateral lists for inclusion in their collateral management schedules.

The relative lack of depth in ETF lending volumes has been exacerbated by a historic lack of familiarity in ETF usage in Europe, however this is now shifting as use of the products surge.

“Having a major custodian such as Citi accepting ETFs as collateral, is further proof that investors are increasingly seeing ETFs as a valuable instrument in securities finance,” said Patrick Mattar, head of BlackRock’s iShares EMEA capital markets.

“As more people discover the utility and flexibility that ETFs can bring to portfolio management, we expect to see a further acceleration in the growth and maturity of the European industry.”

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