Synthetic replication risk VS Securities Lending risk

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RME
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Synthetic replication risk VS Securities Lending risk

Post by RME » Sat Jan 19, 2019 3:53 pm

Hi,
I already know some basics about Synthetic replication risk, I know that they are backed by a basket of bonds or cash and the SWAP contract is renewed frequently to avoid risks.

In spite of everything, physical replication is recommended to avoid the small risk.

What's the difference between SWAP risk and the risk that a physical replication fund takes when lending securities?

Thanks!

https://www.bogleheads.org/wiki/Securities_lending
https://www.bogleheads.org/wiki/Synthetic_ETF

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RME
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Re: Synthetic replication risk VS Securities Lending risk

Post by RME » Sun Feb 10, 2019 1:25 pm

Has someone studied this issue?

I've found this papers about Securities Lending:
VANGUARD - https://personal.vanguard.com/pdf/ISGSL.pdf

From this paper:
In the United States, borrowers generally pledge cash collateral equal to 102% of the value of domestic securities and 105% of the value of non-U.S. shares. The lender can request that the borrower pledge more or less collateral, based on the kind of collateral posted. Outside the United States, borrowers typically pledge non-cash collateral.

Because most loans are open, they are subject to daily renegotiation of the lending fee/rebate.

USA: The value of securities on loan at any one time may not represent more than one-third of the fund’s value.

Vanguard funds do not lend fixed income securities.

Vanguard’s agency agreement requires the lending agent to indemnify our fund in the case of a counterparty default by replacing either the security or the security’s current market value to the fund.


BLACKROCK - https://www.blackrock.com/corporate/lit ... y-2012.pdf

About Synthetic replication:
VANGUARD - https://advisors.vanguard.com/VGApp/iip ... lSynthetic

Market structures and systemic risks of exchange-traded funds
https://www.bis.org/publ/work343.pdf

From this last paper:
UNFUNDED SWAP
Under UCITS regulations, the daily NAV of the collateral basket, which can include cash or equities and bonds of OECD countries, should cover at least 90% of the ETF’s NAV, limiting the swap counterparty risk to a maximum of 10% of the ETF’s market value.

FUNDED SWAP
But unlike in the unfunded swap structure, the sponsor is not the beneficial owner of the collateral assets. Usually this transaction is overcollateralised by 10−20%. This structure is less commonly used by sponsors for synthetic replication of ETF indices.

alex_686
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Re: Synthetic replication risk VS Securities Lending risk

Post by alex_686 » Sun Feb 10, 2019 1:31 pm

I worked for a mutual fund which had securities lent out via Lehman during its bankruptcy. It took a few weeks but we were made whole. Some tax consequences. Overall, a non-issue.

By the way, I don't think the swaps contract would have to be renewed that often. I can't think of one that I have run across that was under 3 years. Most run much longer than that.

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