ETP Due Diligence Tool Developed By iShares

iShares has introduced a due diligence tool aimed at helping professional investors to obtain detailed information about European exchange-traded products.

‘Know Your ETP’ is an interactive questionnaire that allows investors to request and compare information about funds and other exchange-traded products from different providers.

The development of the tool marks the next step in iShares’ due diligence campaign, which was launched in October of last year as part of the issuer’s drive to increase transparency in the industry.

David Gardner, head of EMEA sales for iShares, said: “iShares has campaigned for many years that investors should know what they are buying and what a product’s investment objectives are. Our new ‘Know Your ETP’ tool was created to support clients to compare products side by side. It offers a robust framework and clear standardised process which will help them arrive at an informed investment decision more effectively.”

The tool involves investors selecting the fund they want to analyse, after which a questionnaire is then sent to the provider of that fund, requesting answers to a series of questions covering the tracker product’s structure, replication method, regulatory status, level of disclosure, performance and trading and valuation methods.

However, the wording of the survey would appear to place a much greater level of scrutiny on the providers of synthetically replicated products and raises questions about the objectivity of the questionnaire, given iShares’ position as the leading provider of physical ETFs and the firm’s arguments, articulated last year, that physical and synthetic ETFs are fundamentally different in risk profile.

Providers of physical ETFs face seven questions, five of which can be answered with one or two words. However, providers of synthetic ETFs face 14 more detailed questions.

Synthetic ETF providers are asked, for example, about the credit ratings of swap counterparties, swap spreads, whether securities lending takes place at the level of the swap counterparty, and whether information on collateral holdings, counterparties and swap costs are disclosed daily on ETF issuers’ websites.

Physical ETF issuers involved in securities lending are not asked to disclose counterparties or any details of the securities being lent and the collateral being taken in return, only to describe in general terms the risk parameters of their lending operations, the overall revenues and the fee split between the fund and the issuer/lending agent.

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