Lyxor, one of Europe’s largest ETF providers, has developed a ‘Quality Charter’ to dispel concerns relating to ETFs and, in particular, swap-based “synthetic” ETFs.
The charter commits Lyxor, which is owned by French bank Societe Generale, to a new set of ETF standards designed to ensure greater transparency, efficiency and liquidity.
The announcement by Lyxor follows BlackRock’s recent call for greater transparency and more consistent regulation of exchange-traded products. BlackRock is the company behind iShares range of ETFs.
The commitment by two of the world’s largest ETF issuers to raise standards – a move designed to dispel investor concerns – comes after increased scrutiny of the ETF industry.
The spotlight of this scrutiny has focused on so-called “synthetic” ETFs which attempt to deliver the performance of an underlying index, not by physically replicating the index by holding the underlying constituent securities, but by entering into a swap agreement with a counterparty – a structure Lyxor frequently deploys.
The six charter commitments include: asset management quality, index tracking, transparency, counterparty risk, primary market and secondary market. A number of these commitments go well beyond UCITS’ minimum requirements and should go some way to putting investors’ minds at ease.
Of note, Lyxor will target daily counterparty risk of zero, below the 10% required by UCITS, and will publish the details of all its holdings and counterparties daily on its website. It will also refrain from securities lending.
The full charter is detailed below:
Lyxor ETF Charter
1. Asset Management quality
– Direct ownership by the fund of physical assets in the form of securities
– Securities held by the funds are in segregated accounts solely for the benefit of the fund
– No lending of such securities
– Application of best execution principles to derivatives transactions as required under the UCITS 4
– Independent calculation and publication of the index, no fee in the index
2. Index tracking
– Direct tracking of the index, without any statistical or sampling technique
– Tracking error, computed according to regulatory standards as the volatility of the difference of performances, aims to be below 100bps
– Publication of the effective tracking error in monthly client reports
3. Transparency
– Daily publication on the web site of all directly owned securities
– Daily publication on the web site of all counterparties to all derivatives entered into by the Lyxor ETF and daily disclosure of counterparty risk on each of them
– Daily publication on the web site of all securities held in the form of collateral of derivatives operations
– Publication in the KIID of all fees received by the asset manager
– Provision of Value At Risk reporting to institutional investors upon request
– Provision of VAG and solvency reporting to German institutional investors upon request
4. Counterparty risk
– Daily target of zero counterparty risk per ETF (well below the 10% limit set by UCITS regulations)
5. Primary market
– Access to liquidity through a wide network of Authorised Participants (currently 45 as of 17/10/2011)
– Dedicated website for Authorized Participants allowing electronic routing of creation and redemption orders
– Flexibility of creation and redemption process, through either delivery of cash (all ETFs asset classes) or securities (fixed income & equity ETFs) or index futures (equity ETFs)
– Daily liquidity for large subscription and redemption by APs, at NAV across all asset classes
– Full transparency on creation and redemption costs
6. Secondary market
– On-exchange liquidity currently provided by multiple market makers (15)
– Availability of multiple stock exchange listings (649 listings on 13 exchanges as of 17/10/2011)
– Continuous pricing across multiple listings and in different currencies under normal market conditions
– Providing clients with a choice in terms of trading venue and trading counterparty
– Delivering high levels of reported on-exchange liquidity to lower trading costs