ETFs are becoming increasingly important in the securities lending business. They are already an integral part of US activity, however European volumes lag the US significantly. There are a number of reasons for this situation starting with the fact the ETFs didn't really get started in Europe until several years after they became commonplace in the US. However, ETFs are now well established on this side of the Atlantic. Both the recent BNY Mellon celebration of 10 years of supporting ETFs in Europe, as well as with European ETFs crossing the $100 bn AUM mark, speak to the fact that they are sustainable and important pools of assets destined to grow further.
However, still today borrowing/lending of ETFs is far less common in Europe than it is in the US. Yesterday Morgan Stanley announced a cross-issuer ETF lending book that will actively promote secondary market trading of ETFs through ETF create-to-lend functionality. You can see the story here. This is targeted at hedge funds and other active traders and is consistent with the objectives of Source, an ETF issuer where MS is one of the founding owners. This should be seen as a positive development for both traders and the ETF market as a whole.
My own involvement with ETFs goes back to the summer of 2007 when I had recently launched the i-Sec trading platform for ICAP. i-Sec brought together borrowers and lenders on an electronic trading platform, improving transparency and more importantly for ETFs, liquidity. We added ETFs to the platform and this "market" was more successful in attracting new users to the platform than any other equity lending market on the system.
During the research phase I met many of the leading ETF market participants including the guru of ETFs Debbie Fuhr, then at MS, now riding high at BlackRock and Keshava Shastry at iShares (now part of BlackRock), possibly the only person who is more of an ETF lending evangelist than myself. Virtually everyone in the ETF business was helpful and supportive and had a keen interest in making the ETF market a bigger and better place.
My meetings, pitches and proposals spanned a large part of the community and inevitably included MS. The ETF side of the business was enthusiastic to join. Unfortunately the Equity Finance side was uninterested and won the day. They did not join the platform and traders and the lending market was poorer and less liquid as a result. It's good to see that MS is now working to support its clients and this will undoubtedly enhance European liquidity.Source has made it one of its stated objectives to improve the ability of traders to actively short their ETFs, by implication requiring lending/borrowing. This issuer's efforts should be applauded and they would do well if they mirror the success of Keshava's team. That group has been working diligently for several years to facilitate the borrowing and lending of iShares ETFs and has made a real difference. All good.
Yet I can't help but wonder what might have been had MS and a couple of its peers joined the other 12 firms that were actively borrowing/lending European ETFs on i-Sec. That was more than two years ago and even then it was having a positive impact (albeit a small positive) on the ability of borrowers to access ETFs. Today the market is bigger in terms of AUM and market participants and had i-Sec continued - who knows????
