The market for exchange-traded funds has skyrocketed over 25 years – but the use of them as collateral for loans has not. The observation is made by BNY Mellon, who is now opening for them to back agency lending.

“Right now ETF collateral is underutilized and trapped. Making it more mainstream would increase liquidity and provide more choice for clients in their funding strategies,” says Staffan Ahlner, head of clearance and collateral management in EMEA for BNY Mellon. “

In a recent detailed article, built on a survey of lenders and broker dealers, BNY Mellon gives its fuller picture. One news site that has picked it up is Global Custodian, particularly noting BNY Mellon’s intention to start accepting ETF collateral for agency lending business.

Many still sceptical

Many risk officers are still cautious of the asset type, though proponents hope that the more ETFs are put to work as collateral, the more it will increase funds’ liquidity and reduce market friction.

“Some expect the new universe will cover more than 50 percent of the total global ETF assets under management that are eligible to be accepted as collateral today, versus only 15 percent before,” BNY Mellon writes.

Out of BNY Mellon’s total equity collateral, share ETFs represent 3.9 percent. The amount of ETF collateral pledged or received by clients of BNY Mellon Markets globally was $26 billion. All in all, the global ETF/ETP industry had $5,570 billion under management as of spring 2019.