IU.eu: If I'm investing in a particular fund, can I see what the counterparty exposures are?

Source ETF (Hood, Thompson): We're not planning on publishing that on an ongoing basis, but we have procedures in place to ensure that there is diversification within every fund. We will also have no more than 4.5% exposure to counterparties in aggregate. So, compared to a typical UCITS fund where you can have up to 10% exposure to a single counterparty, we have a lower limit, and we diversify that exposure as well. Currently the exposure is split between three counterparties, but in time, we expect this number to increase. As creations and redemptions will take place on a daily basis, counterparty exposure will be changing dynamically.

IU.eu: What will the collateral held in the swap-based ETFs consist of? Will there be periodic disclosure of the collateral held?

Source ETF (Hood): The funds invest in liquid, listed equity securities, and then use a performance swap to exchange the return on the collateral for the index return. The securities in the collateral basket may be similar to the index constituents, or quite different, but we do expect a fair amount of overlap. It depends on what the product is, and we monitor the correlation, liquidity and diversification of the collateral held. There are of course regulatory requirements for the disclosure of collateral held, and we've had some discussions about the frequency of disclosure, but haven't decided yet.

IU.eu: How does the collateral mechanism work for the T-ETCs?

Source ETF (Hood): The principal is completely invested in Treasury bills. The issuer of the securities then enters into a total return swap to obtain the commodity performance. Those total return swaps represent a possible counterparty exposure to the banks writing the swaps, and these are collateralised on a daily basis by G7 government bonds, which of course include Treasury bills, and cash.

IU.eu: What motivated your decision to list your ETFs and T-ETCs only in Germany? Doesn't this reduce their attractiveness to retail investors in other European markets?

Source ETF (Hood): We took a hard look at this, and one of the things we're keenly focused on is the trading component of exchange-traded funds. We see two gaps between the European ETF market and that in the US. One is the penetration gap, in terms of the percentage of managed assets represented by ETFs, and the other is a liquidity gap, which represents the turnover of ETFs. We think that each gap partially explains the other. We fully recognise that, in Europe, there is something of a trade-off between the number of listings and the assets that you raise, but we are committed to reducing the liquidity gap, and we think that the trade-off that we make in order to reach that goal is to trade in a single place. So we have no immediate plans to cross-list our ETFs and T-ETCs in other markets.

IU.eu: What are the future launch plans? We reported last month that you have 50 ETFs authorised for launch by the Irish regulator.

Source ETF (Thompson): We'll be launching additional funds this spring, and as you've said we have a number of ETFs authorised for launch. It's our intention to add funds in all relevant asset classes, and we're going to do this in a comprehensive and thoughtful way. We structured the company so Source could act as a clearing house or centre for innovation, so that its partners—whether banks, broker-dealers, market-makers or potentially asset managers—can bring ideas to the platform. There's already a great deal of expertise among the existing partners in fixed income, equities and commodities, so we see Source as a centre for the development of innovative new products. We'll be launching a number of these later this year and in coming years.

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