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Lawsuit Raises Awareness Over ETF Securities Lending


After two pension funds filed suit against BlackRock’s iShares on its securities lending practices, exchange traded fund investors are getting a better glimpse into the way fund providers operate.

Securities lending is a practice where mutual funds and ETFs pay agents to lend out shares in their portfolios – the funds are created with exposure to an underlying basket of securities – to other traders and thereby earn interest, writes Ian Salisbury for the Wall Street Journal. [ETF Securities Lending in Focus on iShares Suit]

According to research firm Markit, the practice helps generate about $10 billion in annual revenue for mutual funds and other investment pools. [How ETF Securities Lending Works]

Recently, a lawsuit was filed, contending that BlackRock did not give enough of the extra revenue from securities lending back to shareholders. BlackRock maintains that it remits about two-thirds of its revenue from securities lending to investors while the rest helps cover costs and boost performance.

Experts, though, see the lawsuit as a catalyst for greater transparency into securities lending practices.

“You want sunlight,” William Birdthistle, a law professor at the Illinois Institute of Technology, said in the WSJ article. “Lawsuits like this can provide an investor education.”

The securities lending market has become less lucrative on greater institutional money in ETFs and diminished demand for borrowing ETFs to short or cover trade fails, reports Ari I. Weinberg for Pensions & Investments.

According to Markit Securities Finance, the average “return to lendable” on ETFs is slightly above 10 basis points over the past year, compared to the 20 basis points seen in 2010 and 2011. ETF assets on loan dipped to $9 billion from a peak of almost $14 billion in the last three years while assets available to borrowers grew to $60 billion from $35 billion. Utilization – a measure of demand – has dropped to 15% from about 35% over the last three years.

“The demand to borrow just has not kept pace,” Simon Colvin, vice president for Markit, said in the Pensions & Investments article.

“The majority of demand for shorting is around specific emerging market ETFs,” Paul Lynch, chief operating officer at eSecLending, said in the article. “But the cost to borrow is driven by both the supply and demand as well as the cost to create new shares of an ETF.”

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.