One of the keys to these operations is that they have a short-term duration. There may be buybacks that happen overnight. On the other hand, there are buybacks that can last several months. The AEMF guidelines for ETFs also require the possibility of an early expiry of the transaction. This means that each party may demand at any time the cessation of the operation and its return to its original status. It even requires that this requirement be met for transactions lasting less than 7 days. However, in this case, there will be a penalty that will be reflected in less interest to the original buyer. Mr. Robinhood. “What are the near and far legs in a buyout contract?” Access on August 14, 2020. The EU UCITS Directive, version V of which came into force in 2014, sets a limit for securities lending. As a result, only 10% of the securities of the same counterparty can be suspended. The counterparty risk is therefore limited for European MUTUALs ETFs.
However, the same directive allows 100% of the securities that make up the ETF to be borrowed. Therefore, if the allocation of all securities applied to at least ten counterparties, there would be at least ten counterparties under both rules. On the other hand, under U.S. law, only 50% of etf securities can be lent. There is also a difference between those who make a profit in both transactions. Interest is paid to the security lender. For buyback transactions, the benefit is the payment to the buyer who makes the money available. Pension transactions are generally considered to be a reduction in credit risk. The biggest risk in a repo is that the seller does not maintain his contract by not repuring the securities he sold on the due date. In these cases, the purchaser of the guarantee can then liquidate the guarantee in an attempt to recover the money he originally paid. However, the reason this is an inherent risk is that the value of the warranty may have decreased since the first sale and therefore cannot leave the buyer with any choice but to maintain the security he never wanted to maintain in the long term, or to sell it for a loss. On the other hand, this transaction also poses a risk to the borrower; If the value of the guarantee increases beyond the agreed terms, the creditor cannot resell the guarantee.
The same principle applies to rest. The longer the life of the pension, the more likely it is that the value of the security will fluctuate prior to the buyback and that economic activity will affect the supplier`s ability to execute the contract. In fact, counterparty credit risk is the main risk associated with rest. As with any loan, the creditor bears the risk that the debtor will not be able to repay the investor. Rest acts as a guaranteed debt, which reduces overall risk. And because the price of the pension exceeds the value of the security, these agreements remain mutually beneficial to buyers and sellers. In general, the credit risk associated with pension transactions depends on many factors, including the terms of the transaction, the liquidity of the security, the specifics of the counterparties concerned and much more. The securities loan is a contract between the ETF manager, the lender and a third party, the borrower. The lender then transfers to one-third of the securities in the ETF portfolio for a fee. In addition to collecting this fee, the lender also receives guarantees from the borrower.
These guarantees may be a pool of other securities or other liquidity. The purpose of the guarantee is to guarantee flows for the lender if the borrower does not return the borrowed securities. It is therefore justified because the loan itself carries a counterparty risk.