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Industry leaders in agreement to improve ETF collateral practices 

December 10, 2015

John Maher, ETF Strategy

Markit, a leading global provider of financial information services, has announced that key participants in the exchange-traded fund industry; namely, BlackRock, BNY Mellon and State Street, have accepted Markit’s ETF collateral lists for inclusion in their collateral management schedules.

Markit’s collateral lists support securities lending professionals in identifying which equity and fixed income ETFs to accept or post as collateral. The lists are derived using standardised filtering criteria, including geographic exposure, holding type and assets under management.

Despite holding many characteristics which would classify them as high-quality collateral, many market participants don’t accept ETFs due to the inadequacy of the liquidity and diversification tests employed in analysing the unique ETF structure. For example, tests which look at an ETF’s on-exchange trading volumes to determine it’s liquidity overlook the liquidity of the fund’s underlying securities. This can be exploited through the ETF creation and redemption process and results in a far greater level of potential liquidity than ETF trading volumes would imply. Read more

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