Dan Draper: Looking to good ETF governance

Credit Suisse’s Dan Draper tells David Walker good corporate governance is not just a matter for actively managed funds

The experience and robustness of boards of directors are not issues confined to active funds, and should also be analysed for passive products, says Credit Suisse’s Dan Draper.

The comments from Credit Suisse’s global head of ETFs will propel issues of board composition and corporate governance – traditionally more applied to active products including hedge funds – up the agenda for ETFs and their investors.

Draper says: “At the moment, not enough emphasis has been put on this. You need an independent board with strong governance, and power to ensure the fund is being run correctly, and all manager decisions have to be reviewed and approved by the board.

“One can have policies in place for running an exchange traded fund, but the final monitoring of these policies has to be done by the board of directors, who are accountable as fiduciaries to the ETF investors.”

Re-setting swaps
Draper says issues that boards must oversee rigorously include fund policies around re-setting of swaps, for products that use such instruments in their structure, and the valuation of collateral.

Each issue has recently attracted attention from pan-regional regulatory bodies and global bodies, alongside matters of ETFs and market stability.

Draper says Credit Suisse’s passive products, located variously in Swit erland, Luxembourg and Ireland, engage experts both from within and beyond the company, with expertise in areas such as finance and law, for their boards.

Credit Suisse’s business launched physical ETFs in 2001, then swap-backed ETFs in  August 2010. It now has $18.6bn in total in such products, making it the fourth largest provider of such passive funds.

“As an investor, you have to ask whether the provider is the type who will attract people qualified and experienced with governance?”

It is one of numerous questions in increasingly rigorous due diligence that ETF investors conduct.

Draper says for swap-based ETFs, it is crucial to examine how often the swap is reset and when the market value of collateral underlying it is refreshed, how liquid and ‘solid’ the collateral is, and the quality of the counterparty that provides the swap.

Credit Suisse publishes daily details on the collateral that backs swaps in its products.