Securities lending has been a staple of the investment business since the 1960s, when it was first introduced in the UK. The practice has grown exponentially over the past decade fueled primarily by demand for shares in the growing hedge fund space. This has raised alarm bells among global regulators and they’ve been responding with a host of proposals and new regulations.
Last year for example, the European Securities and Markets Authority (ESMA) called for ETF providers to clearly inform investors of any intention to engage in securities lending. ETF providers will have to explain the risks of securities lending and provide a detailed account of any collateral policies in place not to mention any fees generated by their lending practices.
At the time BlackRock – the world’s largest ETF provider – responded by providing daily details on securities lending operations of its iShares ETF business for investors who want the information.
Last week BlackRock went a step further, tightening its own securities lending standards by setting a new 50% limit on the amount of assets that its ETFs can lend. That’s far below the maximum currently permitted by European regulators, which allow funds to lend up to 100% of assets. BlackRock will also provide indemnity so ETF investors don’t bear any risk of financial loss in the case of a default by a counterparty to a securities lending transaction involving iShares.
This represents a huge step as an industry player moves to deal with counterparty risk – a spectre that has haunted all areas of global markets in the wake of the 2008 financial crisis. Notably, iShares is one of the biggest players in the securities lending business in Europe so this could have a fairly large impact on the market – and it could lead other ETF providers to follow suit.
The industry hasn’t exactly welcomed regulatory scrutiny around securities lending – a couple of industry associations have been resisting some of ESMA’s draft proposals suggesting that all income (net of fees) from securities lending should be returns to the fun and not shared between the fund and the fund manager (current practice).
Will the rest of the industry start to make the same moves? Time will tell…