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"<p>In the case of synthetic index replication, the performance of the index underlying the ETF is achieved through a swap. The ETF enters into a swap agreement with an investment bank, the swap counterparty. The content of this agreement is the transfer of the ETF's cash flows to the swap counterparty, which in return guarantees the performance of the tracked index to the ETF. The risk associated with precise index tracking is transferred from the ETF to the swap counterparty. As physical ownership of the securities represented in the index is no longer a prerequisite for participation in the index performance, it is possible to efficiently track markets that for example are impossible or difficult to access due to trading restrictions.</p> \n<p>UBS employs two different swap structures in synthetic replication: the <strong>fully funded swap</strong> and a combined model (<strong>total return swap and asset portfolio with fully funded swap</strong>).<br></p> \n<h6>Combined model: Asset portfolio and total return swap plus fully funded swap (AP &amp; TRS + FFS)</h6> \n<p>In this replication method, the subscriptions into the ETF are invested in a ratio of approximately 95:5 in a portfolio of assets (the \"asset portfolio\") and a fully funded swap.</p> \n<h6>Asset portfolio and total return swap (AP &amp; TRS)</h6> \n<p>Roughly 95% of the fund assets are used by the ETF to purchase a basket of securities, the asset portfolio. The basket consists of a diversified and liquid portfolio of developed market equities and is optimized on the basis of liquidity considerations. The ETF also enters into an unfunded swap agreement with the swap counterparty to exchange the returns of this portfolio for the desired index performance. The swap counterparty generates this performance by investing in securities and derivatives that replicate the index performance.</p> \n<h6>Fully funded swap (FFS)</h6> \n<p>The remaining fund assets (roughly 5%) are used by the ETF to enter into a fully funded swap agreement with the swap counterparty under which the swap counterparty agrees to deliver the index performance.</p> \n<h6>Exposure to the swap counterparty</h6> \n<p>In order to protect the ETF against the risk of the swap counterparty defaulting on its obligations, the swap counterparty transfers collateral to the ETF in the form of G10 government bonds, supranational bonds and cash. The amount of collateral transferred is subject to haircuts and collateral assets are held at an external custodian bank in the name of the ETF (transfer of ownership). The ETF has immediate access to the collateral in the event that the swap counterparty defaults on its obligations.</p><ol> \n <li>The ETF purchases a basket of securities with approx. 95% of its cash.</li> \n <li>The ETF pledges the performance of the basket to the swap counterparty.</li> \n <li>The swap counterparty pledges the exact index performance (less a fee drag) in return.</li> \n <li>The ETF enters into a fully funded swap with the swap counterparty for approx. 5% of its cash.</li> \n <li>The swap counterparty owes the exact index performance (less a fee drag).</li> \n <li>The swap counterparty transfers collateral to the ETF in the form of G10 government bonds, supranational bonds and cash. The amount of collateral transferred is subject to haircuts.</li> \n</ol><h6>Fully funded swap model</h6> \n<p>In this replication method, the ETF transfers cash to the swap counterparty and in return receives the index performance via a swap contract. In order to protect the ETF against the risk of the swap counterparty defaulting on its obligations, the swap counterparty transfers collateral to the ETF in the form of G10 government bonds, supranational bonds and cash. The amount of collateral transferred is subject to haircuts and the collateral assets are held in a segregated account at an external custodian bank in the name of the ETF (transfer of ownership). The ETF has immediate access to the collateral in the event that the swap counterparty defaults on its obligations.</p><ol> \n <li>The ETF enters into a fully funded swap with the swap counterparty.</li> \n <li>The swap counterparty owes the exact index performance (less a fee drag).</li> \n <li>The swap counterparty transfers collateral to the ETF in the form of G10 government bonds, supranational bonds and cash. The amount of collateral transferred is subject to haircuts.<br></li> \n</ol>"
<https://www.ubs.com/global/en/assetmanagement/capabilities/etfs.html>