HSBC Global Asset Management is set to launch a securities lending programme for its European ETF range in March, ETF Stream can reveal.

For the first time, the firm will be able to lend out the underlying securities of its physically-replicated ETFs in return for basis point revenues.

The programme will be managed by HSBC Security Services and will not include either the HSBC S&P 500 UCITS ETF (HSPX) or any of its sustainable ETFs range.

The company said 75% of revenues from the programme will be returned to the investor, with 25% used to cover the fees and expenses to HSBC Securities Services and the company’s ETF management business, HSBC Investment Funds Luxembourg.

Regarding conditions, HSBC said only "high quality financial institutions" will be eligible for the scheme and they must undergo credit limit authorisation, continuous credit monitoring, and must deliver collateral upfront.

On the latter point, the firm said bonds lending will be subject to a minimum haircut of 102%, while equities from main indices will be accepted with a minimum haircut of 105%. This means the value of the collateral posted will need to exceed the value of the securities being borrowed.

During the lending period, HSBX said the borrower will continue to receive the interest and dividends paid on the collateral, while dividends arising from the borrowed securities will be returned to the lender, with HSBC adding it will retain control of the voting rights associated with the securities it has lent out.

Although ETF issuers take commission, securities lending can be beneficial for ETF investors as they receive a pre-agreed borrowing fee. Also, with most lending durations being for around a day or less, ETF owners are not inhibited from trading their securities.

Olga de Tapia (pictured), global head of ETF sales at HSBC GAM, commented: “The global financial landscape has evolved significantly with deleveraging and regulation changes. After careful review and taking into consideration the growth and focus of our ETF business, we feel it is the right time to begin this programme to further help our clients on their investment journey, although we will not be including the sustainable ETFs at this point in time.

"We expect our securities lending programme to enhance what are already some of the best value ETFs in Europe.”

The reasons for borrowing securities in the first place are twofold. First, short-sellers entering a position on a security they do not own, need to deliver something to their counterparty. They therefore go to security lenders to borrow the requisite security.

Second, because of collateral upgrade swaps. Banks require high-grade bonds – such as gilts or US treasuries – to post as margin with central clearing counterparties during OTC trades. They therefore borrow bonds from securities lenders and post assets they don’t immediately have use for as collateral.

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