ETFs primed to solve collateral conundrum

ETFs are well positioned to ease the burden of a lack of eligible collateral in the financial markets, according to panelists at the SWIFT London Business Forum.

“A lot of institutional investors do want to go short and use ETFs as collateral,” said Sander van Nugteren, director, Capital Markets iShares. “ETFs are not being accepted as collateral, but €520bn worth of ETFs track assets are regularly accepted as collateral.”

A recent announcement from Eurex that it would begin accepting ETFs as an eligible form of collateral has sparked discussion about the instrument’s greater role in the collateral environment.

“Of all the European CCPs, only Eurex accepting them as collateral which is really strange,” said Anna Neumann, ETF specialist, KCG Europe.

From the beginning of April, Eurex began accepting five ETF products offered by BlackRock’s iShares, making it the first clearing house in Europe to accept the instruments as collateral.

Demand for collateral is increasing due to regulations such as Dodd Frank, EMIR and non-cleared margin rules. Subsequently, concerns have been raised on the availability of high grade collateral once all these regulations have been rolled out.

ETFs are said by many to have many of the features to be classes as high quality collateral, however over 55% of attendees of Markit’s London Securities Finance forum in 2015 said they did not accept ETFs as collateral.

One of the major developments has been the launch of Markit’s collateral index, allowing the industry to analyse different ETFs. BNY Mellon has incorporated ETF collateral lists within its collateral management offering to simplify the process of implementing ETF’s as a collateral type.