MiFID II 'a game-changer' for ETFs

MiFID II is set to be a game-changer for ETFs, and will see them used in a wide variety of ways from securities lending to collateral.

ETFs will be used in a greater capacity for securities lending and as collateral in the coming years due to developments in the European market, according to a panel.

Institutional investors will become more comfortable with ETFs due to MiFID II requirements for ETFs to be reported, according to panelists at the SWIFT London Business Forum. These rules will shine a light on the liquidity of the products, therefore providing more transparency.

“MiFID II is going to be a game-changer and the sooner it comes in, the better,” said Sander van Nugteren, director, Capital Markets iShares. “The one huge hole in the ETF market structure in Europe is that ETFs aren’t MiFID instruments, no requirements to print ETF trading volumes.

He added that there is a perception issue with the market believing there is no supply and demand.

“We are in the early stages, but we are seeing far more availability of people to borrow ETFs. We have 10 billion available and 2 billion is out on loan,” van Nugteren continued.

Industry leaders such as BlackRock, BNY Mellon, Markit and State Street have attempted to improve ETF collateral practices, and have called for greater use of ETFs in securities lending.

Less than 5% of ETFs are currently used for lending in Europe compared with around 25-30% in the US. It has been suggested that this 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.

“It is about the buy-side willing to lend it and the custodians being willing to work with the end clients,” said Anna Neumann, ETF specialist, KCG Europe.

Nuemann added that over 70% of trade flows aren’t reported as there is no need to, therefore “the liquidity is hidden”.

The ETF market is growing in Europe at a significant rate, despite lagging behind the US. ETFs listed in the continent have gathered net inflows for 18 consecutive months, yet are sparsely used in securities lending.

“People that are analysing this for a revenue stream believe it is to small,” adds van Nugteren. “But what is required is that people need to be willing to put 100m Eur out on loan. You need to start with small steps.”