Morgan Stanley launches a dedicated lending book in European ETFs

This significant new development in the European ETF market is aimed at creating greater liquidity and supply of ETFs to meet the increasing demand from investors to borrow these products.
The create-to-lend process involves borrowing the constituent stocks in the underlying basket and using the creation process with the issuer to manufacture new ETF shares. These shares can then be lent out to investors looking to go short.

Through this process, the broker (an Authorized Participant of the fund) passes through to the ETF the liquidity available in the borrow market for the underlying constituent stocks.

This is directly analogous to the way market-makers buy and sell the underlying stock basket to facilitate trading in the ETF shares.

The pass-through of underlying liquidity – both trading and borrowing – is a key reason for the popularity of ETFs.
Commenting on this announcement, Matthew Tagliani, Executive Director and Head of ETF Product for Europe & Asia at Morgan Stanley said, “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. We are excited to be the first firm to launch a dedicated lending book and take the European ETF market to the next stage in its development.”
Since the launch of the Source ETF platform in April 2009, Morgan Stanley has been active in manufacturing and lending Source ETFs.

“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,” said Tagliani.
The initial product offering of 51 equity index funds (over 100 separate listings) has been chosen from the largest and most actively traded ETFs and represents 23% of the total assets under management in Europe and more than 67% of total on-exchange turnover.

Over time, Morgan Stanley expects to expand this offering. By providing a stable supply of manufactured inventory, ETF borrowers benefit from substantially lower borrow fees than current market rates and far greater -in some cases 10x or even 100x – availability of supply.