ETF takeover deepens as debt funds are accepted as collateral

(Bloomberg) – CME Group Inc. has scored another win in the booming $1.3 trillion bond exchange-traded fund market.

The derivatives exchange operator’s clearing unit will accept a handful of short-term Treasury ETFs to meet initial margin requirements, according to a statement on Tuesday. Five funds, including the $18 billion SPDR Bloomberg 1-3 Month T-Bill ETF (ticker BIL), are eligible, CME said separately.

It’s a boon for a rapidly growing segment of the $6.6 trillion ETF market, which has long been dominated by index-based equity funds. Assets in bond ETFs have exploded in recent years as institutions and professional fund managers have become familiar with the structure, a trend that has been accelerated by the Federal Reserve’s surprise decision to buy credit funds at the height of the pandemic market turmoil in March 2020. CME’s decision to allow debt ETFs as collateral further embeds the products into the wiring of Wall Street, according to industry experts.

“Overall, this is another use case for ETFs, in addition to long-term investing, tactical directional betting and hedging,” said Todd Sohn, ETF strategist at Strategas Securities. “Using ETFs makes all of this much simpler and more efficient.”

The addition of short-term Treasury ETFs to the list of permitted collateral should provide “greater flexibility and efficiency in managing collateral costs,” CME said in Tuesday’s statement. Unlike actual treasury bills – the proceeds of which must be reinvested after the securities mature – debt ETFs have a constant maturity and therefore do not need to have the exposure carried over, which is more “efficient on operational plan,” CME said.

The CME’s decision comes months after the New York Department of Financial Services said it would allow insurance companies to classify fixed-income ETFs as individual bonds rather than stocks for requirements purposes. of capital – a catalyst cited by BlackRock Inc. in their forecast for global bond ETF assets to reach $5 trillion by 2030.

“Much like recent wins in insurance, this increases the use cases for fixed income ETFs with institutions,” said Dave Nadig, financial futurist at data provider and research consultant VettaFi. “It won’t mean billions overnight or anything, but it does make those funds specifically much more useful.”

Of course, it remains to be seen how robust demand will be for using bond ETFs as collateral, according to Coalition Greenwich’s Kevin McPartland. But the decision shows just how important ETFs have become to the functioning of bond markets, he said.

“The next question will be how or if this offering is being used by clearing brokers, or are they largely sticking to the margin deposit status quo,” said McPartland, head of market structure research. company market. “This is another signal that fixed income ETFs are cemented as an important part of the fixed income market.”

–With assistance from Alexandra Harris.