Citi has added exchange traded Funds (ETFs) to the list of instruments it accepts as collateral in agency securities lending transactions.
The decision came after the latest regulatory developments, including the second Markets in Financial Instruments that took effect on 3 January.
The investment bank aims to diversify its pool of collateral to meet mounting margin requirements.
According to Citi, the ETF market is still a relatively untapped source of collateral that can enable investors to access further liquidity and improve collateral efficiency, while minimising counterparty risk through index diversification.
The bank highlighted the more than $4.9 trillion in global assets under management current held in ETFs, along with the roughly $630 billion of inflows in 2017 alone.
Citi utilises the IHS Markit’s collateral lists to identify eligible ETF instruments in equities and fixed income.
The bank plans to launch an integrated fund administration for ETFs in Europe this year, following the buildout of its ETF Services business in the US, Latin America and Asia.
As part of its expansion into the ETF space, Citi brought on former iShares global head of relationships Andrew Jamieson as global head of ETF product, as well as Gareth Myburgh as Europe, the Middle East and Africa (EMEA) ETF product manager, late last year.
David Martocci, global head of agency securities lending at Citi for EMEA, said: “As the ETF industry continues to mature with increased levels of supply coupled with greater transparency enabled by recent regulatory requirements, beneficial owners and borrowers can benefit from the liquidity and portfolio diversification offered by ETFs while retaining sufficient levels of transparency and efficiency required to maintain high-quality collateral.”
Patrick Mattar, head of BlackRock’s iShares EMEA capital markets added: “Having a major custodian such as Citi accepting ETFs as collateral, is further proof that investors are increasingly seeing ETFs as a valuable instrument in securities finance.”
“As more people discover the utility and flexibility that ETFs can bring to portfolio management, we expect to see a further acceleration in the growth and maturity of the European industry.”
