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ETF securities lending Generate additional returns and reduce investors' net costs

UBS ETFs engage in securities lending for select physically replicated ETFs with the aim to generate additional returns and thus reduce investors' net costs. UBS attaches particular importance to a responsible securities lending concept.

What is ETF securities lending?

In ETF securities lending, the lender (UBS ETFs) transfers a given number of securities from its ETF portfolio to a third party (borrower) for an agreed period in return for a fee.

  • UBS ETFs engage in securities lending only for select physically replicated ETFs domiciled in Switzerland, Ireland, and Luxembourg 
  • The objective is to reduce investors' net costs through additional income.
  • Securities lending transactions of UBS ETFs are overcollateralized to a minimum of 105%.
  • A haircut is additionally applied to Swiss-domiciled ETFs
  • Careful selection of borrowers and daily mark-to-market valuation of collateral serve to minimize risk
  • High degree of transparency through daily publication of collateral assets for each subfund at ubs.com/etf > products

How can you minimize securities lending risk for ETFs?

According to the European fund UCITS directive and the Swiss CISA, securities lending may be up to 100%. Actual lending rates for UBS ETFs have been considerably lower. UBS ETFs have set a cap of 50% of the net asset value of an ETF on securities lending.

To minimize securities lending risk for UBS ETFs, borrowers are carefully selected and monitored on a daily basis. Before borrowers receive the securities, they must provide the lender - the ETF - with collateral. The collateral assets serve to secure the borrower's obligations to the lender. The collateral is transferred to a completely separate custody account or collateral account that is ring-fenced from the lender's balance sheet.

Securities lending may be terminated on demand by the lender on a daily basis. A daily mark-to-market valuation of loans and collateral ensures that the value of the collateral posted by the borrower is always adjusted to the correct level. In addition, securities lending transactions of UBS ETFs are always overcollateralized to a minimum of 105%. For Swiss-domiciled ETFs, a valuation haircut is additionally applied to the underlying collateral. Securities lending ceases when it is terminated by the ETF or the borrower's demand is satisfied. The collateral held is returned to the borrower only after the securities have been returned to the ETF.

Securities

UBS ETFs offer a high degree of transparency through daily publication of collateral assets for each subfund.


How can ETF securities lending help to generate additional returns?

The borrower pays the ETF a fee for the duration of the securities lending period. In addition, all entitlements such as coupons or dividends paid on the securities while on loan are passed on to the ETF in the form of a manufactured payment.

As such, securities lending enables the fund to generate additional revenues, which are reflected in the net asset value (NAV) and directly reduce net costs to investors as a result.


Securities lending for ETFs domiciled in Switzerland, Luxembourg and Ireland

Currently accepted collateral for ETFs domiciled in Switzerland

For Swiss-domiciled UBS ETFs that engage in securities lending, the following types of securities are currently accepted as collateral (excluding securities of the borrowing counterparty):

  • Government bonds issued by G10 countries. Government bonds not issued in the US, Japan, UK, Germany or Switzerland must have at least an "A" rating or equivalent
  • Corporate bonds with minimum rating of "A" or equivalent
  • Equities issued by companies represented on the following indices: AEX, ATX, BEL20, CAC, DAX, INDU, UKX, HEX25, KFX, OMX, OBX, SMI, SPI, SPX, SX5E

Source: UBS AG, August 1, 2014

Type and level of collateralization required for Swiss-domiciled ETFs*

Type of collateral

Government bonds

Corporate bonds

Level of collateral  

105%

105%

Haircuts

100% of the underlying securities are added to the collateral, less the following haircuts:

International equities: 

15% 

Government bonds issued by US, JP, UK, DE, CH: 

0% 

Government bonds with a minimum rating of "A" (excluding US, UK, DE, CH): 

2% 

Corporate bonds with at least an "A" rating: 

4% 

Haircut

A haircut is a valuation discount applied to the underlying securities. It serves as an additional safety buffer and varies depending on the type of securities pledged as collateral and their expected price fluctuations. As haircuts are deducted from the underlying collateral, additional collateral must be provided corresponding to the respective haircut.

Currently accepted collateral for ETFs domiciled in Luxembourg and Ireland

For UBS ETFs, domiciled in Luxembourg and Ireland, that engage in securities lending, the following types of securities are currently accepted as collateral (excluding securities of the borrowing counterparty):

  • Fixed income securities issued and/or guaranteed by governments of the following countries:
    • The following G10 countries: Belgium, the Netherlands, Canada, Sweden, France, Switzerland, Germany, Japan, UK and USA
    • Only the following OECD countries: Australia, Austria, Denmark, Finland, Luxembourg, New Zealand and Norway, as well as
  • equities in the form of world stock indices

Type and level of collateralization required for Luxembourg and Ireland domiciled ETFs*

 

Type of collateral

Type of borrowed securities

Government bonds

International equities

International equities

105%

105%

US equities

105%

105%


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