Authorised participants by the numbers – Part 2

The rapid growth of exchange trade funds (ETFs) is supported by a robust, dynamic “ecosystem” made up of many players. Among the key contributors to smooth ETF operations are authorised participants (APs). These financial institutions work with ETF issuers to create and redeem shares in the primary market. To learn more about the role of authorised participants, see Authorized participants and market makers – Part 1. This paper looks deeper into the Australian ETF ecosystem to analyse the breadth and scope of the AP universe.

A broad, diverse universe

All ASX listed ETFs are supported by numerous APs. On average, Australian-domiciled ETFs have have 10 “contracted” APs and 4 “active” APs (Figure 1).

A contracted AP has an effective agreement in place with an ETF issuer, even if the AP does not regularly create or redeem ETF shares. An active AP has created or redeemed shares of an iShares ETF within the last year to August 20211. Not all APs are active at the same time. For example, some institutions may complete formal paperwork to become an AP so they can participate when they see opportunities to profit or provide liquidity for key client demand. This presence of contracted APs helps ensure vibrant competition exists to provide ETF creation and redemption services. If an active AP were to step away, another contracted AP could step in to execute creation and redemption activity—even if they hadn’t been active in the fund previously

Figure 1: APs for Australian Domiciled ETFs

APs for Australian Domiciled ETFs

Source: Blackrock as at August 2021

Size matters

Because larger funds—those with more assets under management (AUM)—typically have higher trading volumes and client demand, they tend to be supported by a greater number of APs than funds with smaller AUM (Figure 2). In fact, on these larger exposures it is more common to have demand from large institutional clients which increases the competition and interest from APs who provide their clients with access to ETFs and other financial instruments.  It is not uncommon in Australia for smaller funds to have limited primary market activity.

Figure 2: Average Contracted and active APs by iShares ETF AUM

Average Contracted and active APs by iShares ETF AUM

Source: BlackRock as at August 2021

Participation across asset classes

Some asset classes require specialized infrastructure and/or expertise, such as inflation linked fixed income, international fixed income or specific international equities. This specialized expertise can result in the majority of activity sitting with a few or a single AP.

With reference to figure 3, in the specialized area of international fixed income one AP managed around 60% of the Australian iShares flow on a dollar value basis in the year ending August 2021.

Figure 3: Gross Primary Market Flow for iShares International Fixed Income ETFs

Gross Primary Market Flow for iShares International Fixed Income ETFs

Source: BlackRock as at August 2021

A diverse playing field

The breadth of the AP universe should alleviate any concerns that iShares Australian listed ETFs rely too heavily on a limited number of institutions. Indeed, total creation and redemption activity is spread across many APs. In total, 9 APs created and redeemed shares over the year to August 2021. The AP with the highest percentage of activity, accounted for 38% of all ETF creations and redemptions by dollar value (Figure 4).

Figure 4: iShares Gross Primary Market Flow by AP

iShares Gross Primary Market Flow by AP

Source: BlackRock as at August 2021

Activity on exchange exceeds primary market turnover

APs are key contributors to smooth ETF operations, and even in the less mature Australian ETF market with a lot of small recently launched ETFs, the secondary market trading exceeds the primary market activity.

We estimate that the ratio of secondary market activity to primary market activity is 1.6 for the market and 1.4 for the iShares Australian listed ETFs. (Figure 4).

Figure 4 - Gross primary and secondary market activity

iShares Gross Primary Market Flow by AP

Source: Bloomberg, gross turnover 1 year to August 2021. Primary market activity is estimated using the reported change in shares on issue.

The bottom line

iShares Australia ETF creations and redemptions are spread over a diverse base of APs. iShares Australia have agreements in place with a multitude of APs, and while every AP is not always active in all funds at the same time, additional APs stand ready to step in when opportunities arise. Larger funds, by assets and by trading volume, may typically have more APs than smaller funds, but small funds take advantage of the scope of the AP universe. Overall, this broad engagement by APs supports a healthy ETF ecosystem. Reviewing this data over time shows that in Australia the iShares AP universe is diverse and efficiently supports ETF primary market activity even in times of market stress2.