Any ETF specialists on board?

[Uncle GroOve]

Hi folks.
Is there enyone well versed in ETFs here?
My problm is the following: our firm needs to invest our client's cash USD positions.
Having already excluded MMKT funds, fiduciary deposity, bond mkt (it's dead), and leaving the $$ on the bank acct (no interest + potential counterparty specific risk) I'm thinking of the following:
purchase GLD exchange traded fund
buy a zero cost atm collar (long put, short call) to sterilize potential downside price potential.

The problm now is: what counterparty risk am I incurring?
Not the CH bank, of course, or at least not directly.
State Street Bank (i.e. the financial backer of the ETF)?
Whatever custodian the CH bank chooses?
Both the latter?

Any ideas would be sincerely appreciated.

Ciao

Paul

[hbunny]

If I was one of your clients, I'd be taking my money out of your hands as fast as I could.

Soliciting investment advice from a general discussion forum is not what I'd expect from my financial advisors, but having worked for investment banks, I wouldn't trust any financial advisors.

[Uncle GroOve]

LOL thanks.
Do you think that there are no other professionals on board, and that said professionals *never* talk to each other about these kind of issues?

However you are right - I should have refrained from posting on this forum. There are indeed better venues to discuss these things amongst professionals.

Paul

Okay..for background only!
I have some experience but only with equity-linked ETFs so anything I say is generic. However that experience has taught me one thing. You and your lawyers need to check the small print in the ETF prospectus very carefully and on a case by case basis. I have absolutely no experience of gold ETFs so I can only offer some pointers based on the equity variety. The prospectus will tell you what the fund can hold in terms of underlying assets. Many equity index ETFs hold baskets of actual stocks which are supposed to replicate the performance of the underlying index and you can certainly buy ETFs which segregate those assets and hold them for the benefit of the ETF investors so they are not affected by the insolvency of the arranger/ custodian ie there is no counterparty risk. But if the ETF is authorised to buy swaps, notes, options or other derivative products then that will introduce counterparty risk of the issuer of the swap or note etc.
The other thing you need to check with ETFs is liquidity and costs..how the entry/exit works - entry/exit/management costs; bid/offer spreads; commissions; liquidation process etc.
So in terms of Gold ETFs, the first question I would ask is whether the ETF backed by 100% physical bullion held in a vault for the benefit of the holders of the ETF or are they using/authorised to use derivatives. A major global ETF player like State Street or Barclays Global Investors would explain all this to if you contacted them.
In terms of the collar, I have no idea how gold options work but assuming it's the same as equity options it's hard to see how you could avoid counterparty risk on them. Are there exchange traded options with margin posted by the writer of the option to mitigate this?

[g_zuri]

A zero cost atm long put / short call is a synthetic short position.
Combined with a long postion from the ETF what you have is a complicated structure which has no sensitivity to the price of gold at all, but lots of spreads for the market makers to take out of you, transaction costs and credit risk.

http://www.theoptionsguide.com/synth...ort-stock.aspx

[Swisstree]

	Quote:	hbunny
	If I was one of your clients, I'd be taking my money out of your hands as fast as I could. Soliciting investment advice from a general discussion forum is not what I'd expect from my financial advisors, but having worked for investment banks, I wouldn't trust any financial advisors.

I would totally disagree, lots of financial managers are to be found bluffing their way around their clients portfolios and many are to be found down the pub pretending to all in sundry, whilst ****ed, how much they know and how good they are.. meanwhile Uncle GroOve has just asked an open, honest question in an conscientious way.. you get my trust for that alone.
I would much prefer to see more honesty in the financial services instead of secrets and bluffing.. then maybe we wouldn't be in this mess..

[AbFab]

I have it on good authority that burying your investment in the garden is the way to go.

The short-term downside is a shortage of shovels...

[Swisstree]

just waiting for my shovel and then let the digging begin..

[Uncle GroOve]

	Quote:	Nev
	Okay..for background only! I have some experience but only with equity-linked ETFs so anything I say is generic. However that experience has taught me one thing. You and your lawyers need to check the small print in the ETF prospectus very carefully and on a case by case basis. I have absolutely no experience of gold ETFs so I can only offer some pointers based on the equity variety. The prospectus will tell you what the fund can hold in terms of underlying assets. Many equity index ETFs hold baskets of actual stocks which are supposed to replicate the performance of the underlying index and you can certainly buy ETFs which segregate those assets and hold them for the benefit of the ETF investors so they are not affected by the insolvency of the arranger/ custodian ie there is no counterparty risk. But if the ETF is authorised to buy swaps, notes, options or other derivative products then that will introduce counterparty risk of the issuer of the swap or note etc. The other thing you need to check with ETFs is liquidity and costs..how the entry/exit works - entry/exit/management costs; bid/offer spreads; commissions; liquidation process etc. So in terms of Gold ETFs, the first question I would ask is whether the ETF backed by 100% physical bullion held in a vault for the benefit of the holders of the ETF or are they using/authorised to use derivatives. A major global ETF player like State Street or Barclays Global Investors would explain all this to if you contacted them. In terms of the collar, I have no idea how gold options work but assuming it's the same as equity options it's hard to see how you could avoid counterparty risk on them. Are there exchange traded options with margin posted by the writer of the option to mitigate this?

The GLD apparently is backed by physical bullion - at lest that is what they say.
State Street is the financial backer for the ETF, and there are listed options available.
I am not trying to gain any gold directional exposure in the trade, BTW.
The idea is to park the $$$ in a interest rate neutral environment.
After discussing with another colleague I am more incline to think that the final counterparty risk of the trade would still be the CH bank + depositary combo. The options being listed are not a problem di per se (unless the central option clearinghouse goes bust), and the ETF as I said is supposed to be fully backed by physical gold (something confirmed by Scotia Mocatta, BTW). No margins are due on the option combo, as the short call would be covered by deliverable underlying ETFs.

BTW and FWIW and without wanting to start a sh*tstorm, this is what my boss' clients expect from us - to avoid those trades/ideas where everyone else has been bleeding: money market funds, money market deposits (both eliminated appx 6 weeks ago), structured "capital guaranteed" (ahem) notes. And obviously - leaving cash on the acct is a no-no.

Peace

Paul

I can give you the name of one that has been recommended to me and seems to be doing well. I am not sure about forum rules though. I would make nothing off it myself. Actually alhtough it looks tempting and seems to be doing very well, I don't want to get tied up with that. Why ETFs?

If the forum allows it I will give you the contact, it is probably a well known Swiss company

[Uncle GroOve]

	Quote:	hoppy
	I can give you the name of one that has been recommended to me and seems to be doing well. I am not sure about forum rules though. I would make nothing off it myself. Actually alhtough it looks tempting and seems to be doing very well, I don't want to get tied up with that. Why ETFs? If the forum allows it I will give you the contact, it is probably a well known Swiss company

I wasn't looking for an ETF managing company - Lord only knows how many are out there, and we have at one time or another had to do with almost everybody's products.

I was looking to see if anyone was working as a professional - especially in settlements / middle office - with regards to the specific issues which had to do with hairsplitting, legalese and counterparty risk, all things which someone kindly advised not to discuss on a "generic" site like this.

Still - thank you for your interest!

Paul

[Shorrick Mk2]

	Quote:	Uncle GroOve
	I am more incline to think that the final counterparty risk of the trade would still be the CH bank + depositary combo.

Negative. The final counterparty risk on a gold fund is the issuing company, if the fund is based on bullion. The CH bank is (legally) not considered counterparty risk.

But your real interest is not the legalese but knowing what happens in a catastrophic scenario - i.e. either the intermediary or the issuer going bust. In both cases you're screwed until such time the liquidator overseeing the liquidation releases your assets.

If however you're buying say soft commodities ETFs that are based on synthetics then your final counterparty risk is the issuer of the synthetics (AIG, not to name them), not the company managing the ETF.

[Goldtop]

ZKB have a gold ETF, which they declare is physically gold backed. Also ZKB has a state guarantee.

Apart from the valid risk worries, the transaction costs for the ETF and the derivatives may swallow much of the anticipated benefits.

[Goldtop]

	Quote:	hoppy
	Why ETFs?

ETFs are usually liquid, quotes are usually available, the exchange is a neutral party monitoring transactions and product (term-sheet, prospectus), issuer is obliged to hold the underlying(s) in a dedicated account, etc...

[Uncle GroOve]

	Quote:	Goldtop
	... Apart from the valid risk worries, the transaction costs for the ETF and the derivatives may swallow much of the anticipated benefits.

In our case customers benefit from an "all-in" fee (i.e. no transaction specific fee).

As a very recent developement we are looking very closely at the fine print of the prospectus. The one of the GLD contains wording that doesn't make me feel too comfortable.... especially in relation to the transport, storage, verification of purity of the bullion

Paul

[Goldtop]

	Quote:	Uncle GroOve
	In our case customers benefit from an "all-in" fee (i.e. no transaction specific fee).

What about the bid/ask spread?

[Uncle GroOve]

	Quote:	Goldtop
	What about the bid/ask spread?

I shall concede on this front .
Buying US denominated debt would not be immune from bid-ask spreads (and infixed income they're scary nowadays), though.

Ciao

Paul

[Igor Z]

Sorry for late reply.

Here is a good site to find ETF information www.XTF.com

	Quote:	Uncle GroOve
	Hi folks. Is there enyone well versed in ETFs here? My problm is the following: our firm needs to invest our client's cash USD positions. Having already excluded MMKT funds, fiduciary deposity, bond mkt (it's dead), and leaving the $$ on the bank acct (no interest + potential counterparty specific risk) I'm thinking of the following: purchase GLD exchange traded fund buy a zero cost atm collar (long put, short call) to sterilize potential downside price potential. The problm now is: what counterparty risk am I incurring? Not the CH bank, of course, or at least not directly. State Street Bank (i.e. the financial backer of the ETF)? Whatever custodian the CH bank chooses? Both the latter? Any ideas would be sincerely appreciated. Ciao Paul

[Cashboy]

	Quote:	Uncle GroOve
	The GLD apparently is backed by physical bullion - at lest that is what they say.

I love that statement.

Just reading some of the advise here about the security on basically a piece of paper, the back up insurance, who the ultimate risk is with etc etc.
I gather all these advisors and financial investment planners are doing this as charity work and none of these costs are ever added to the plan/investment of the client....my ar8e.

At the end of the day, all those lovely complicated financial instruments (cons to me) only make money for the people who flog them and the people who manipulate them.
With interest rates so low, banks not disclosing their real bad debts (to be revealed in a later episode), quantative easing (printing money for governments to pay the bills) which surely will devalue the US Dollar and GB pound, I would be inclined to actually buy the physical lump of gold and hold it in a safe deposit box in Switzerland than have a nice little piece of paper from an investment company which to me is an IOU note and could be worthless at some time.

I am not a Merchant Banker.

[SemAms]

If i were the investor in GLD etf, my perceived risk wud be in:
- management company/state street for actually managing the fund (product risk),
- my agent/broker since they have my cash and supposed to execute the trade (counterparty/settlement risk)
- my custodian if different from the executing broker (custody risk)

	Quote:	Shorrick Mk2
	Negative. The final counterparty risk on a gold fund is the issuing company, if the fund is based on bullion. The CH bank is (legally) not considered counterparty risk. But your real interest is not the legalese but knowing what happens in a catastrophic scenario - i.e. either the intermediary or the issuer going bust. In both cases you're screwed until such time the liquidator overseeing the liquidation releases your assets. If however you're buying say soft commodities ETFs that are based on synthetics then your final counterparty risk is the issuer of the synthetics (AIG, not to name them), not the company managing the ETF.