Quick question that I had from a client today. I think I know the answer but want to be sure. Can the underlying shares in an ETF or Mutual Fund be lended? I would imagine they can in an mutual fund but not an ETF. Even if they could in an ETF, would they do this considering the whole point of the fund is to match an index and not pick up extra income? Or could that income theoretically be made for the banks own profit?
yes and yes. mutual funds will have pretty strict limitations on how much they can lend (overall, by position, etc). ETF’s are created or redeemed for the purpose of stock loan. create the ETF by going long the basket of the underlying stocks, package it up, lend away. ETF’s in the lending market are funny like that- they’ll get tight, start trading at decent premiums, and once they have a rich enough premium, someone will go create more and flood the market and they ease back down. foreign ETF’s sometimes tend to stay tight in the lending mkt longer- they’re more of a pain to create. the thing that kind of turned the whole lending industry on it’s head recently, though, was the collapse of bear and lehman. counterparty risk now is huge. the incremental income of lending your longs isn’t massive but it used to be a no brainer because nobody thought there was any real risk associated with it. pull up stories on northern trust or state street or any of the major lending banks throughout the credit crisis and they took some pretty huge hits b/c of their lending programs.
Dang Bannisja u know quite a bit about sec lending u use to be at SST? Pretty much all the major index players /custodians are the players in the sec lending game. Let them be the SST, Barclays even conservative Vanguard. With short rates so low I can’t imagine these guys r making a ton of money. But even 15bps on 1 trillion a year is a ton of money.
^ bingo, it’s always and always been a game of inches. but it adds up fast when you are adding a lot of zeros to the numbers. i have spent a fair bit of my career in or around all things sec lending… it’s a funny little world. lenders are not very transparent (by design), but slowly the sec finance field is becoming less like an episode of the sopranos and more a quantitative/tech driven sort of place.
It has to be to manage the collaterial pool. To me these sec lendin guys were running an enchanced cash fund and trying to run an arbitage between the collaterial n their asset pool. I remember back in 05-6 when I worked at a custodian (my first job) the yield curve inverted and all the sec lending guys were hurting… they couldn’t make money off the curve and instead had to buy more and more credit securities to earn some yield then in 07 and 08 this bit then in their back when these assets stopped trading and took on losses. My roommate just applied for a sec lending job any advice (I never worked in sec lending just custody operations)