February 2019
In preparation for the implementation of custom baskets, BNY Mellon has authored a series of documents, with this being the first, to help ETF issuers maximize their use of this old for some but new capability for many. As the playing field becomes level with respect to custom basket capabilities, ETF issuers that historically have been left out and who for the first time will have the same capabilities as others using custom baskets need to be prepared for the added benefits and competition focused on the same pool of liquidity. BNY Mellon’s experience servicing issuers with custom basket capabilities has provided us with a few areas we believe should be a focus.
While the SEC final ruling has yet to be released, here are a few things for issuers to consider:
In summary, when market makers have confidence that inventory can easily and efficiently be managed through the primary market via a custom negotiated basket, competition will increase – competition typically begets better prices/tighter bid-ask spreads, which is a win for investors. The increase in competition while good for investors will require that ETF issuers be prepared to support this capability ensuring that they have a seat at the table with liquidity providers when negotiating baskets.
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