HSBC Global Funds ICAV notified shareholders of a proposal to increase the proportion of its sub-fund, Global Aggregate Bond UCITS ETF, that may be subject to securities lending arrangements from 30% to 50% in early March.
Shareholders are expected to benefit from enhanced performance due to the expected increased income generated through the fee paid by the borrowers to the fund for lending additional securities.
Securities lending is standard market practice for collective investment schemes and many of HSBC’s peers permit their sub-funds the flexibility to subject up to 50% of their assets to securities lending arrangements.
Risks and mitigation
In lending its securities, the sub-fund is subject to the risk that a borrower may not fulfil its obligations or go bankrupt leaving the sub-fund holding collateral worth less than the securities it has lent, resulting in a loss.
As with any extensions of credit, there are risks of delay and recovery. Should the borrower of securities fail financially or default in any of its obligations under any securities lending transaction, the collateral provided in connection with such transaction will be called upon.
However, the sub-fund could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. The collateral will typically be maintained at a value of at least equal to the market value of any securities loaned. However, in the event of a sudden market movement there is a risk that the value of the collateral may fall below the value of the securities transferred.
HSBC’s announcement has not been reviewed by the Central Bank of Ireland and it is possible that changes may be necessary to meet requirements.