IU: Danièle, how do you think that this year's equity market declines—from 40-50% in some of the bigger markets, to 70%-plus in some emerging markets—will affect the ETF business?

Tohmé-Adet: We already have the figures for allocations to ETFs over the last two months, and these show inflows of around €4 billion in September and over €5.5 billion in October. These were invested across the asset class range, and not just in fixed income or other non-equity classes. Investors have been attracted by the security of ETFs—limited or no counterparty risk, their transparency and flexibility, and the in-built diversification that they offer. The recent market crisis has given a big vote of confidence to ETFs.

IU: Where do you think these flows have come from?

Tohmé-Adet: I think some investors had cut their market positions, and when they chose to reinvest their cash, they went for the most transparent option—ETFs. Even when markets stabilise, we expect these trends to continue, with people moving away from classically managed active funds and from stock picking into ETFs. I've been working a lot with the funds industry lately, and everywhere I go, people say they want more transparency and better risk control, and ETFs fit this role.

IU: We've seen some liquidity problems in certain areas of the ETF market over the last month, with some funds moving to discounts to their index values. Do you think that the current market infrastructure needs to change to ensure accurate pricing?

Tohmé-Adet: There are two levels of infrastructure to ensure efficient pricing—market makers, with their obligations to the exchanges to maintain two-way quotes; and the Authorised Participants, with their significant contribution to liquidity through their responsibility for both creations and redemptions. The European exchanges that we work with have been monitoring liquidity during the crisis, and they have a list of control steps to ensure that market makers meet their obligations. There have been some extreme cases where spreads widened dramatically, but this was reflecting the situation in the underlying stocks.

IU: Do the exchanges have influence over the Authorised Participants as well as the market makers?

Tohmé-Adet: The market makers have a signed commitment with both the exchange and the issuer. The exchange will monitor and control the market maker(s) according to their obligations under this agreement, and they can also encourage the largest number of Authorised Participants to take part. Depending on the exchange, there have to be at least one or two market makers. The exchanges can't control Authorised Participants' role as directly, but they can still encourage them to get involved.

IU: We've had a lot of debate this year about the benefits and risks of different forms of index replication—physical or synthetic (swap-based). EasyETF uses both, so where do you stand in this debate?

Tohmé-Adet: I think that the debate that has taken place in the last couple of months has been a very healthy one. It has shown that, although there is some counterparty risk in synthetically managed ETFs, it is very limited and it is monitored constantly. The names of swap counterparties have to be on a tightly approved list, for example. But it's still important to realise that if you want exposure to certain types of asset classes—commodities, or credit, or exposure with no tracking error to an emerging market, to give another example—and also within a UCITS III format, then synthetic replication is the best solution. You've seen that we've recently launched ETFs on Egypt, Kuwait and the UAE, and it would have been very costly to have tried to construct these using physical replication. So in this case, swap-based or synthetic replication was vital.

IU: There have been reports of some decline in securities lending activity recently—might this cause a change in ETF fees, as this has been a revenue source for some issuers?

Tohmé-Adet: For the moment, we haven't seen evidence of this. We continue to lend securities—I stress, on a fully cash-collateralised basis. But if a decline were to take place, it wouldn't affect the fees so much as the tracking error, as securities lending helps you to optimise the index replication.

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