A new survey, ‘Efficient Portfolio Management Techniques: Attribution of profits derived from Securities Lending by UCITS Exchange-Traded Funds’ from public interest NGO BETTER FINANCE reveals that ETF managers have diverse approaches to the income distribution from their securities lending transactions.
Securities lending is the practice of lending a stock, bond or other financial instrument in exchange for interest. Typically, the borrower pays a fee to the lender for the shares.
BETTER FINANCE explains that the EU rules governing the practice of securities lending by UCITS funds, stipulate that 100 per cent of the income from securities lending – net of direct and indirect operational costs – must be returned to the funds.
“Securities lending or repurchase agreements should always be aimed at increasing the return of the fund and can’t be used to generate surplus income for the fund management company. Yet in practice many asset managers pocket from a third to nearly half of the revenues generated from securities lending,” BETTER FINANCE says.
An analysis of mandatory fund disclosure documents performed by BETTER FINANCE found that one manager returns as much as 95 per cent of the revenues to the fund, keeping just 5 per cent to cover for the operational costs incurred.
“Other managers, however, pocket up to ten times that amount (49 per cent). This raises serious concerns with regards to their compliance with the rule from the European Securities and Markets Authority (ESMA) that 100 per cent of the net income from securities lending must be returned to the funds,” BETTER FINANCE says.
BETTER FINANCE writes that it calls on the National Competent Authorities and ESMA to investigate how operational costs incurred by securities lending can vary so dramatically – from 5 per cent to 49 per cent of revenues – from one fund manager to the other.
The body writes that pending any further explanations from fund managers, it strongly suspects that a significant part of the net income derived from securities lending would not be returned to fund investors as it should be.