Securities lending is very big business for the largest investment funds and fund managers. For example, CalPers, the California state pension fund, earned nearly $1.2 billion from lending assets over the eight years ending in June 2008 (on a pool of securities lent that was most recently valued at $38 billion) - in other words it enhanced returns by more than 30 basis points per annum over the period. For the biggest fund managers in the indexing and ETF business - BGI, Vanguard, State Street, Northern Trust - securities lending revenues are a significant contributor to overall profits.

However a number of big problems have arisen for the securities lending business in recent months: first, concerns about possible default by stock borrowers have increased; second, some significant losses have occurred in cash reinvestment programmes (where managers reinvest the cash collateral received in exchange for the stock loaned); third, regulatory restrictions on short-selling have caused a dramatic slowdown or even a stop to lending in certain areas of the market.

IndexUniverse.eu surveyed a number of leading European ETF providers and posed them questions about their securities lending activities. 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) Of the ETFs you manage, how many are involved in securities lending?

• iShares - From our Dublin product range 30 iShares ETFs are currently involved in securities lending. In addition, all 81 iShares ETFs from our Munich product range are involved in securities lending.
• Lyxor - We do not lend out the underlying collateral in the funds (IU note - Lyxor's ETFs are all swap-based)
• db x-trackers - There is no lending of the assets of any of the db x-trackers ETFs (IU note - db x-trackers' ETFs are all swap-based). However, with swap-based ETFs, it is possible to generate lending revenues which can be passed on in the performance of the ETF to offset the impact of management fees. The relevant trading desk at DB will invest in the underlying index components to hedge its exposure under the swap. These stocks form part of the DB's lending pool and any revenues generated can be passed on to the ETF as an enhancement. The difference between this approach and traditional stock lending at the fund level is that there is no borrower default risk for the ETF. These risks are faced by DB only and there can be no negative impact on the performance of the swap.
• easyETF - All our fully-replicated ETFs (21/58 ETFs) use securities lending. Those of our synthetically-managed (swap-based) ETFs which hold equities as collateral also have lending transactions.
• XACT - 2 out of 11 ETFs use securities lending
• ETFLab - All our 10 ETFs use securities lending to improve performance
• ETF Securities - currently our swap-based ETFs do not engage in securities lending 

IU comment - Note that, although securities lending is primarily the domain of in specie ETFs (which fully or partially replicate the underlying index), both db x-trackers and EasyETF undertake lending from within the collateral basket used to back their swap-based ETFs. Lyxor and ETF Securities, on the other hand, do not do so for their swap-based ETFs.

A very varied set of practices.

IU has been unable to quantify the effect of enhancements to swap-based ETFs from the lending of stocks in the collateral basket. The securities lending revenues earned by in specie ETFs are typically quantified in the annual report and accounts.

2) Who is the approved agent for stock lending on behalf of the ETFs?

• iShares - BGI Ltd. is the appointed lending agent for our Dublin iShares funds, while for our Munich iShares funds it is handled via Clearstream and HypoVereinsbank's lending desk.
• Lyxor - not applicable.
• db x-trackers - not applicable.
• easyETF - BNP Paribas Security Services
• XACT - Handelsbanken
• ETFLab - Clearstream Banking, DekaBank Deutsche Girozentrale, Frankfurt am Main
• ETF Securities - not applicable 

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