Morgan Stanley launches lending book for European ETFs

Morgan Stanley has launched a lending book for European ETFs across multiple issuers, to create greater liquidity and supply of ETFs for investors increasingly seeking to borrow these funds.

The lending book allows for a create-to-lend process, which involves borrowing the constituent stocks in the underlying basket of the fund and then using the creation process with the issuer to make new ETF shares.

These new shares can then be lent out to investors seeking short positions. In order to do this, the broker passes through to the ETF the liquidity available in the borrow market for the underlying constituent stocks.

This process is in line with the way market makers buy and sell the underlying stock basket, to allow for trading in ETF shares.

The firm says it is this pass-through of underlying liquidity, in both the trading and the borrowing, which is one of the key reasons for the popularity of ETFs.

Morgan Stanley head of ETF Product for Europe and Asia Matthew Tagliani says: "The lack of supply of borrowable ETFs in Europe is a source of frustration for investors, particularly those accustomed to trading in the US where ETFs are among the most liquid securities in the stock lending market."

The bank has been active in manufacturing and lending Source ETFs, since the launch of the exchange-traded product issuer last April. Morgan Stanley was one of the initial partners in Source's open architecture platform comprising multi-swap providers.

Tagliani adds: "The significant level of activity in our Source lending book and persistent requests from clients for supply in other issuers' products demonstrated to us that this was a service the market needed."

The inaugural offering of 51 equity ETFs has been selected from the largest, most actively traded funds, representing 23% of total assets under management in Europe and over 67% of on-exchange turnover.

Morgan Stanley says by providing a constant supply of manufactured inventory, ETF borrowers can benefit from lower borrow fees than current market rates, and greater availability of ETF supply.