The Collateral Risk of ETFs

Mardi | 2014-11-04
Sully 5 – 16h-17h20

Christophe HURLIN – Grégoire ISELI – Christophe PERIGNON – Stanley C.H. YEUNG

As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counter party risk. To mitigate the funds’ exposure, their counterparties must pledge collateral. In this paper, we present a framework to study collateral risk and provide empirical estimates for the $40.9 billion collateral portfolios of 164 funds managed by a leading ETF issuer. Overall, our findings contradict the allegations made by international agencies about the high collateral risk of ETFs. Finally, we theoretically show how to construct an optimal collateral portfolio for an ETF.