More On Counterparty Risk (Swap-based ETFs)
October 14, 2008
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The turmoil of the last few months in the financial sector has made every investor concerned about potential exposure to failing banks. Counterparty risk is no longer an esoteric subject, but has jumped to the very top of the list of questions to be asked when making an investment in exchange-traded products.
While ETFs benefit from being backed by collateral (when compared to ETNs and other, similar debt obligations), there are still some potential counterparty exposures involved. First, there is a difference between European swap-based ETFs (where there is potential counterparty exposure to the swap provider, albeit capped at 10% of the ETF's net asset value, under UCITS rules) and in specie ETFs (which hold the securities in the underlying index, or at least a sample of them). Second, there can be potential counterparty exposures resulting from the lending of an ETF's securities by the manager.
In this week's feature we will focus on how swap exposures are managed for swap-based ETFs.
IndexUniverse.com surveyed a number of leading European ETF providers and posed them a number of questions in relation to both swap-based ETFs and securities lending. The managers that have participated in the survey are iShares, Lyxor, db x-trackers, EasyETF, XACT, ETFLab and ETF Securities. BBVA, the Spanish ETF provider, explained that it had only in specie ETFs, and did not lend its ETFs' securities.
All answers refer to European-domiciled ETFs only.
1) What is the current total number of your ETFs and how many of these are swap-based?
IU comment - an interesting variety of structures, with Lyxor and db x-trackers offering only swap-based ETFs, iShares, XACT and ETFLab offering only or primarily in specie products, and easyETF offering both.
2) Who is the swap counterparty (in the case of multiple swap counterparties, please list all)? Please give the full legal name(s) of the counterpart(y/ies).
IU comment - db x-trackers and Lyxor use their parent banks, unsurprisingly, as the swap counterparty. iShares's choice of counterparty reflects the Munich location of its swap-based ETFs. Of the three given names Deutsche Bank has - by one notch - the highest credit rating, though pay attention to the CDS market for a market-based view of credit risks, as the established credit rating agencies have done a poor job at spotting potential problems.
3) How do you assess and monitor counterparty risk?
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