Fund securities lending guidelines spark confusion

Major asset managers are keeping up to 40% of gains from securities lending, despite new guidelines requiring them to return all revenues to investors, after costs.

The European Securities and Markets Authority (Esma) guidelines on exchange traded funds (ETFs) and other Ucits issues, which came into effect on 18 February, require Ucits products engaging in securities lending to return all revenues, net of operating costs, back to the fund.

However, some asset managers have yet to change their policies and are still pocketing large chunks of revenue generated by securities lending in ETFs, which in the case of BlackRock and State Street Global Advisors (SSgA) amounts to 40%.

Although both SSgA and BlackRock, for example, have yet to change their fee-split arrangements, it is unclear whether they will have to alter their securities lending programmes, even though they claim they comply with the guidelines.

A SSgA spokesperson said: ‘While the ESMA guidelines became effective [on Monday], there are transitional provisions (section XIV) included in the guidelines that detail when specific guidelines must be implemented.

'Some rules had no transitional period (cash collateral and ETF primary market provision) while others have a 12-month transitional period that began yesterday. We intend to be fully compliant with the Esma guidelines in consideration of the stated transitional provisions.’

However, a major issue is Esma’s lack of clarity about what constitutes ‘cost’ and how much of the revenue can be used to cover the expense of engaging in securities lending. SSgA said: ‘On the issue of direct expense, we do believe that the fee paid to a securities lending agent – the revenue split – should be recognised as an operating expense and as such would not be prohibited or directly influenced by the Esma guidelines.’

Only 12 of its 45 European SPDR ETFs engage in securities lending, with 40% of revenues going to the custody lending agent, which in this case is State Street Global Markets.

BlackRock engages in securities lending across a large proportion of its iShares range, but does not use a securities lending agent, instead running its securities lending programme in-house.

Although this issue also affects actively managed funds, the lack of accessible and clear information means ETFs are coming under greater scrutiny by comparison, due to their greater transparency.