According to Moody’s, the rollout of MiFID II could encourage institutional investors to make greater use of exchange-traded funds for securities lending and collateral purposes.
Before the MiFID II regime, ETF trades did not have to be reported, and, being largely transacted over-the-counter, this meant trading volumes and hence liquidity were understated. The new EU rules require ETF trades to be reported.
Moody’s expects ETFs to become more widely used by institutional investors as part of securities lending as a result, according to Marina Cremonese, senior analyst at the credit rating agency. She said there has been a general trend towards increased use of non-cash assets as collateral in securities lending in the past decade. ETFs had been part of this, but in Europe their use had been constrained by a perception of low liquidity.
Increased transparency brought about by MiFID II may also make it easier for pension funds to accept ETFs as collateral for securities lending, although liquidity will be only one of their considerations, she added.
The MiFID II rules have come into effect after a buoyant year for ETFs. BlackRock yesterday said that its iShares business expanded at its fastest pace last year, with institutional investors deepening their usage of ETFs as financial instruments alongside bonds and derivatives in fast-growing buy-side to buy-side networked trading.
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