A well-managed securities lending programme can be a valuable portfolio management tool, and may enable funds to receive an additional source of income that may add incremental risk-adjusted returns to a fund’s overall investment return objective.
Since 10 July 2018, ABF Pan Asia Bond Index Fund (PAIF) has launched a securities lending programme, which has been designed to open up the fund to the potential benefits of securities lending while mitigating associated risks. In our view, the fund may generate income from the securities lending program, which can offset some of the associated costs of the fund and potentially enhance its returns. The addition of Asian local-currency denominated bonds into the lending pool may deepen liquidity in the secondary markets.
Securities Lending Revenue and Costs
All revenues that may arise from securities lending in respect of an ETF, net of direct and indirect operational costs, will be returned to the fund.
70% of the total income received from securities lending transactions will be credited to the account of the Trust. The balance of any such income will be for the account of the securities lending agent.
No income from securities lending transactions accrues to the Manager.
What is Securities Lending?
A securities lending transaction involves the temporary transfer of securities from one party (the lender) to another party (the borrower). Securities lending enables funds enrolledin the securities lending programme (the lender) to potentially generate an additional source of income.
In all cases, the securities borrower is a financial intermediary, such as a broker, dealer or market maker. In exchange for borrowing the securities from a fund, the borrower transfers collateral to the lending agent who holds that collateral in an account in the fund’s name. The borrower pays a fee for this service and is contractually obliged to return the loaned securities, while the fund receives a fee for the use of its assets. The loan is usually arranged by the securities lending programme coordinator, known as a lending agent.
During the term of the loan, the borrower must provide collateral to the funds to mitigate against the risk of non-return of any loaned securities. The borrower receives all distributions and dividends arising during the period of the loan and pays these amounts to the lending agent at the same rate as if the securities were held in custody. The lending agent then pays all distributions on to the underlying lender. The borrower will generally have the right to exercise any voting rights arising during the period of the loan that relate to the loaned securities.
How the programme works?
The State Street Global Advisors’ Securities Lending Committee (Committee) oversees and comprehensively reviews performance and effectiveness, and provides oversight of State Street Global Advisors’ Global Securities Lending programmes.
The Committee evaluates the performance of State Street Global Advisors’ securities lending agents. It also reviews and challenges State Street Global Advisors’ Global Securities Lending programmes against industry standards and performance, current risk appetite levels, and current market conditions.
In addition, the securities lending programme for each participating fund is reviewed, approved and overseen by the respective fund boards.
In general the minimum acceptable collateral currently accepted are:
Government securities and Supranational debt issued or guaranteed by an entity or trust that has a minimum long term rating of: “A” by Moody’s, “A” by Standard and Poor’s, or “A” by Fitch including sub-categories or gradations therein.
Collateral Margin Requirements
The collateral amount is marked to market daily. If collateral levels are insufficient for a particular loan, the borrower is required to provide more collateral. If the loan is over- collateralised, the lending agent may return some of the collateral to the borrower.
Government securities transferred as collateral shall have a minimum collateral market value of not less than 102.5% of the loaned securities.
Securities Lending Report
The Securities Lending Report is updated on a monthly basis and available on abf-paif.com.
HSBC PLC (acting through its securities service division) provides a counterparty default indemnity. In accordance with this indemnity, if a counterparty fails to return securities lent by an ETF, subject to the terms of the securities lending agreement, HSBC PLC would either purchase replacement securities for the ETF, or shall credit to the ETF an amount of cash equal to the market value of the securities.
The percentage out on loan will depend on the type of fund and securities held but will be subject to the below limits established by State Street Global Advisors as internal guidelines for the lending programme:
Maximum of 50% on loan for a single security of the aggregate market holding of Securities of that issue available for lending, as determined by the Securities Lending Agent and as agreed by the Trustee.
The aggregate outstanding value of loaned securities for any fund in the ETF range shall not exceed 30% of its total net asset value.
Potential Risks of Securities Lending
As with all investment activities, securities lending bears risks. Here are some of the key risks and safeguards that are in place:
Risk Mitigates and Considerations
Counterparty or Borrower Risk
Borrowing counterparty default
Failure to provide manufactured income or entitlements
Counterparty credit risk management
Controlling the quality of approved borrowers
Monitoring daily margin requirements
Borrower default indemnification
Marked to market daily
Failed Trade Settlement
Agent lender depth of supply
Agent lender can execute buy in to force settlement
Comprehensive oversight and ongoing communication with the lending agent
The collateral is sufficiently diversified in terms of country, markets and issuers
Source: State Street Global Advisors, as of 31 December 2021.
While not without risk, a well-managed securities lending programme can help to unlock an additional source of income in portfolios.
Securities lending programs and the subsequent reinvestment of the posted collateral are subject to a number of risks, including the risk that the value of the investments held in the collateral may decline in value and may at any point be worth less than the original cost of that investment.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore (the "MAS").
The ABF Pan Asia Bond Index Fund (the 'PAIF') is an authorized unit trust in Hong Kong and Singapore only. Authorization does not imply official recommendation. Nothing contained here constitutes investment advice or should be relied on as such. Past performance of PAIF is not necessarily indicative of its future performance. The prospectus for PAIF is available and may be obtained from State Street Global Advisors Singapore Limited (the "Manager") (Singapore Company Registration number: 200002719D, regulated by the MAS) and authorized participants. Investors should read the prospectus before deciding whether to acquire units in PAIF. The value of units in PAIF and accruing to such units, if any, may fall or rise. The semi-annual distributions are dependent on PAIF's performance and are not guaranteed. Redemption of PAIF’s units could only be executed in substantial size through designated dealers and the listing of PAIF on the Stock Exchange of Hong Kong Limited and the Tokyo Stock Exchange (the 'Stock Exchanges') do not guarantee a liquid market for the units, and PAIF may be delisted from the Stock Exchanges. The Fund's Prospectus is available from State Street Global Advisors or can be downloaded from www.abf-paif.com*.
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The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Diversification does not ensure a profit or guarantee against loss.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Frequent trading of ETF's could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
The Markit iBoxx ABF Pan-Asia Index referenced herein is the property of Markit Indices GmbH and is used under license. The PAIF is not sponsored, endorsed, or promoted by Markit Indices GmbH or any of its members.
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