Some market participants have said the practice of securities lending, which carries the risk that the borrower of the securities could default and that the collateral transferred will not be sufficient to repurchase the securities, remains opaque.
Alain Dubois, chairman of ETF provider Lyxor, said: “There is no difference between the ETFs. Synthetic replication is equivalent in terms of risks to physical replication with securities lending.”
Regulators in Europe and the US have been concerned that synthetic ETFs have been mis-sold to unwary investors who do not understand the counterparty and derivatives risks they are running. But Dubois says physical ETFs are just as bad. He said: “The issue is securities lending and it is one part of the ETF market that regulators haven’t even considered yet”. However, ETF investors can benefit from stock lending, which attracts a fee and which many providers return to the fund, helping to offset management fees.
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