BlackRock‘s Canadian division has announced it has begun securities lending for its iShares Bitcoin ETF, effective August 25. This follows a required 60-day advance notification to investors.
The decision to proceed with securities lending was initially outlined in a prospectus issued on June 26. The prospectus detailed the fund’s ability to participate in these types of transactions in accordance with Canadian regulations. This move aligns the iShares Bitcoin ETF with numerous other iShares ETFs in Canada that leverage securities lending to boost income.
Securities lending involves a fund temporarily loaning out its assets, such as stocks or other securities, to borrowers – typically major financial institutions. In return, the fund receives collateral and collects a lending fee.
Borrowers often need these securities to address short-term settlement needs, fulfill collateral requirements, or facilitate short-selling strategies.
By enabling securities lending for IBIT, BlackRock is essentially opening up an additional revenue stream for the ETF. The company emphasizes that risk mitigation measures are in place to protect investors.
BlackRock introduced its Bitcoin ETF to the Canadian market this past January. This fund provides investors with exposure to Bitcoin denominated in both Canadian and U.S. dollars. It currently has approximately CAD $358.9 million (equivalent to US$257 million) in assets under management.
IBIT Securities Lending Program Details
According to the fund’s prospectus, BlackRock Canada has designated two affiliated entities to manage the securities lending process. These are BlackRock Institutional Trust Company (BTC), based in San Francisco, and BlackRock Advisors (UK) Limited (BAL), located in London.
The program mandates that borrowers provide collateral equal to at least 102% of the current market value of the loaned securities. Acceptable forms of collateral include cash or other securities, with values adjusted daily to reflect market fluctuations.
Furthermore, BlackRock offers a borrower default indemnity, pledging to replace any securities that are not returned if a borrower defaults on their obligations.
To manage risk, the program limits the value of loaned assets to a maximum of 50% of the fund’s total net asset value at any given time. Cash collateral received is restricted to investments in highly liquid securities with maturities not exceeding 90 days.
BlackRock’s internal risk management team oversees the program, utilizing proprietary technology and analytical models to closely monitor exposures. The firm prioritizes quality, liquidity, and interest rate sensitivity when investing cash collateral, adopting an approach intended to minimize the potential impact of market volatility.
Potential Risks and Investor Protection
While the program includes various protective measures, securities lending inherently involves risks that could potentially affect fund holders.
These risks include potential delays or failures by borrowers in returning the loaned securities, which could prevent the ETF from participating in important corporate actions like mergers or dividend distributions.
Changes in market dynamics could also lead lending agents to curtail their activities, reducing the ETF’s potential revenue. Furthermore, revisions to tax laws or regulatory frameworks might impact the treatment of loaned securities, potentially delaying or reducing payments to the fund.
However, BlackRock emphasizes that the requirement for collateral exceeding 100% of the loaned securities’ value, coupled with its indemnity arrangement, significantly reduces the potential for investor losses. This framework aims to ensure that even in the event of a borrower default, BlackRock can restore the fund’s portfolio without a substantial adverse effect.