BlackRock imposes 50% cap on ETF security lending

BlackRock has implemented a 50% limit on the amount of securities lent out in each of its iShares exchange traded funds (ETFs), in response to client concerns.

In another move to bolster its securities lending practices, BlackRock is now also indemnifying the funds.

The asset manager’s securities lending programme means extra revenue can be generated from BlackRock lending out the ETFs’ underlying securities, with 60% of this revenue paid back to the fund, to the benefit of the investor.

However, despite the revenue generated, some investors have aired concerns over the counterparty risk caused by securities lending, the relative opacity surrounding the nature of the party to which BlackRock is lending and the amount that is lent out in each ETF.

For example, some ETFs have lent out a significant portion of their underlyings, with certain funds lending out as much as 90% of their securities, while holding Italian and Japanese equities as collateral.

At the end of last year, iShares showed its FTSE 250 ETFs had lent out 92% of its securities on average over the course of a year. At one point, the maximum it had lent out was 95%.

The returns garnered from lending out this ETF’s securities, though, generated a net figure of 14.7 basis points for the fund.

Under the new securities lending regime, a 50% limit is imposed on the amount lent out in each fund, even though BlackRock said it has the capacity to lend out a lot more.

Joe Linhares, head of iShares EMEA, said: ‘We listened to our iShares clients’ feedback and whilst clients appreciate the additional returns received from securities lending and are comfortable with our risk management process, clients said they would be more comfortable with limiting lending to 50% of a fund.

‘So whilst we continue to believe that we can manage large on-loan percentages where there is borrowing demand and our institutional client base does not have the same concerns as iShares clients, we have taken our client’s feedback on board and apply a 50% limit for iShares funds.’