Throwing Light On Source

April 20, 2009

Source ETF is throwing serious institutional weight behind an ETF push. 

Source ETFthe new collaborative exchange-traded products venture that launched its first set of funds today—promises to shake up the European ETF industry. With the backing of Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley, it is throwing serious institutional weight behind an ETF push. spoke today with three directors of the new outfit—Ted Hood, CEO; Peter Thompson, director of strategy; and MJ Lytle, director of marketingto ask them about their firm's structure, their first product launch and future development plans. You've launched your ETFs and T-ETC commodity trackers under what you call an open architecture platform, with three founding members. How do you see this developing, and what would be the ideal number of participants in the Source platform?

Source ETF (Hood): From the current three, we'd see the ideal number of participants as somewhere between five and 10, and we're in active discussions with a number of potential partners. At some point, you'd want to stop adding partners, as the complexity of the arrangements would diminish the value investors would get from the diversification. How does your platform compare with the ETF Exchange that ETF Securities is planning?

Source ETF (Hood): So far we've only seen a press release about the ETF Securities platform, which doesn't contain a great deal of detail, so we don't really have a basis yet on which to compare. I'd like to add, though, that we're not just a platform, but a stand-alone company, a specialist provider of exchange-traded products. How is Source capitalised?

Source ETF (Hood): We're an independent, separately-capitalised company, currently wholly-owned by the three companies mentioned in the press release [Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley]. We don't disclose precise details of the shareholdingsthat's for the shareholders. You mention on your Web site that overall counterparty risk in the ETFs will be capped at 4.5% of NAV, and that the swap to which counterparty risk relates will be written by one of the three shareholding banks. How do you decide which bank gets to write the swap for an ETF creation, and how does an investor know whose counterparty risk he incurs?

Source ETF (Hood): First of all, I want to mention that, for the ETFs which we offer, there is a third-party investment manager, Assenagon Asset Management, and they are responsible for the day-to-day management of the funds. By and large, we expect that swaps will be allocated more or less in accordance with where the assets are raised. Since these are funds, everyone shares equally in the counterparty risk, irrespective of when a particular investment was made. We have procedures in place to ensure that we have diversification on an ongoing basis, and it's the responsibility of Assenagon to ensure that these are followed.



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