ETF securities lending primed for European boost

Agent lenders such as State Street and BlackRock have begun to accept ETFs as collateral.

Use of ETFs in the European securities lending market could soon be set to rise due to more efficient cross-border structures and heightened transparency.

Less than five percent of ETFs are currently used for lending in Europe compared with around 25-30 percent in the US. 

According to industry experts, that gap could close as asset owners become aware of the extra income potential from lending ETFs and non-cash collateral becomes more attractive to risk-taking financial institutions.

“While government bonds have always been widely accepted, main index equities are now also well-established as eligible collateral,” said Matthew Fowles, iShares.” What we are witnessing is ETFs finally entering the mainstream as a viable form of collateral.’

With liquidity an issue for market participants, agent lenders such as State Street and BlackRock have begun to accept ETFs as collateral, while Euroclear is working on an issuance model that enables ETFs to be traded in multiple venues and settled easily in an ICSD.

MiFID II is also set to increase transparency by mandating that ETF trading volumes will have to be reported.

‘I am sure there are a lot of ETF holders out there who are simply not aware that securities lending is possible,’ says Neil Cracknell, head of European equities trading at State Street. 

He added that the high fees around ETFs in this field will fall if the lending supply can be increased.