Eurex has extended its scope of acceptable collateral to include exchange-traded funds (ETFs), a move which could significantly boost the ETF market. From the beginning of April, Eurex will accept five ETF products offered by BlackRock’s iShares, according to a circular released last week, making it the first clearing house to accept the instruments as collateral. Growth in ETFs has taken off in recent years, in which institutional investors have been attracted by its low fees. However, ETFs have yet to become fully adopted as an industry tool for collateral purposes. Industry leaders such as BlackRock, BNY Mellon, Markit and State Street have attempted to improve ETF collateral practices, and have called for greater use of ETFs in securities lending. Demand for collateral is increasing due to regulations such as Dodd Frank and EMIR, however concerns have been raised on the availability of high grade collateral which is accepted by clearing houses. In a recent report by the European Securities and Markets Authority (ESMA) has warned of a shortage of high quality collateral in the case of bear market conditions. However, the acceptance of ETFs could boost the growth of non-cash collateral due to the increased cost of holding cash.
From April, Eurex Clearing will accept five of BNY Mellon's iShares as collateral, making it the first clearing house to accept ETFs as collateral. The move comes as new regulations increase demand for collateral. BNY Mellon, BlackRock, State Street and Markit have called for greater use of ETFs in securities lending as the sector continues to expand. It is thought the increase in the scope of acceptable collateral could significantly boost the ETF market.