The Collateral Risk of ETFs

Christophe Hurlin (1) , Gregoire Iseli (2) , Christophe Pérignon (3) , Stanley Yeung (3)

1 LEO - Laboratoire d'économie d'Orleans [2008-2011]
2 University of Geneva
3 GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC

As most Exchange-Traded Funds (ETFs) engage in securities lending or are based on total return swaps, they expose their investors to counterparty 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.

Mots clés: passive investment; derivatives; systemic risk; Asset management

Domaines: Economies et finances

Christophe Hurlin, Gregoire Iseli, Christophe Pérignon, Stanley Yeung. The Collateral Risk of ETFs. 2014. ⟨halshs-01023807v1⟩