05 April 2012

FN: Five concerns over ESMA's ETF-UCITS consultation

1. ESMA could restrict how much of a UCITS portfolio can be used for securities lending.
2. ESMA will restrict the re-investment of cash collateral to “risk free” assets.
3. ESMA will allow a UCITS fund to recall a security that has been lent at any time, or to terminate any securities lending or repo agreement. EFAMA and the IMA were against the proposal, which EFAMA said would “restrict UCITS from entering into fixed-term securities lending or repo contracts”. Both these contracts require that securities lent out are returned at a specific point in time. EFAMA said this would therefore “restrict the return available from this technique. This would have a damaging effect on returns from such activities with little benefit from a risk mitigation perspective”.
4. ESMA could treat physical and synthetic ETFs differently when it comes to securities lending.
5. ESMA will not apply securities lending rules across all funds. BlackRock again expressed concerns over a level playing field. It said: “It is critical that any new rules be made applicable in respect of all UCITS fund structures which engage in securities lending (not just ETFs). We would welcome the opportunity to discuss this further with ESMA.”

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