What is the Issuer Driven ETF project?

What is the Issuer Driven ETF project?

Background on Traditional Bond An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks (source: Investopedia) Bond hold securities that usually track an index, while shares are traded in the exchange. Index Authorized Participants buy underlying securities (basket) and create ETF units. They monitor arbitrage opportunities between and underlying securities usually charge lower fees than regular mutual funds. Fund Bonds Authorized Participants Cash Exchange Cash Investors Gemloc Advisory Services 2

What is the Issuer Driven ETF project? A World Bank Group initiative to support the development of local currency bond markets via an innovative Government Bond ETF structure. Key Innovation: Direct involvement of the issuer in the ETF structure which: facilitates efficient tracking and rebalancing, assures liquidity allows government to design that are aligned to development goals This structure is unique in the ETF industry Gemloc Advisory Services 3

ETF Industry Trends Main drawbacks of traditional EM Bond : Difficult to track the index: high cost to launch and manage portfolio Inability of authorized participants to effectively support fund manager and exploit arbitrage opportunities Index Greater use of synthetic instruments and sampling to replicate index Higher management fees and tracking error Fund Bonds Authorized Participants Cash Exchange Cash Investors Gemloc Advisory Services 4

Issuer Driven ETF: Innovative Structure The main difference between the two structures is the active involvement of the issuer solving the main drawbacks of traditional : Index Selecting benchmark Supporting the ETF launch Selecting Fund Supporting market making Fund Authorized Participants Exchange Bonds Cash Cash C A S H B O N D S Issuer Investors Gemloc Advisory Services 5

How is the project supporting local financial market development? Development Consolidation of price references aligned with market development objectives Transparency Daily underlying portfolio valuation (Price discovery mechanism) Liquidity Increased market making activity on and underlying instruments Launched with larger size than traditional Diversification Additional vehicle for investment in fixed income Enhances competition in asset management business Costs Direct involvement of the issuer reduces costs, fees may be reduced to final investor Gemloc Advisory Services 6

Gemloc Advisory Services: Meeting our objective Mexico Peru Chile Colombia Brazil Uruguay LAC Regional ETF MENA Regional ETF EAP Regional ETF Emerging Markets ETF

Beyond the Sovereign Debt Market: corporate bonds ETF

Sponsor (e.g. Development Bank) Driven ETF: Corporate Bonds Fund Authorized Participants Exchange Bonds Cash Cash Investors C A S H B O N D S Bonds Index Sponsor Bonds Corporate Issuer 1 Corporate Issuer 2 Corporate Issuer n Gemloc Advisory Services 9

What role for the sponsor? The sponsor is assumed to be a Government related financial institution committed to developmental goals Selects Index : eligible corporations following strategy to develop corporate bond market (sectors and companies) Acts as underwriter Supports rebalancing needs of the ETF by : Holding a portfolio of corporate bonds included in the index, Establishing a contractual arrangement with the pool of corporate issuers Appoints corporate bond market makers to provide liquidity Gemloc Advisory Services 10

How is the project supporting corporate bond market development? A new role for development banks in EMEs Provides an effective transition mechanism from traditional direct lending schemes to market based funding Fosters corporate bond market development Supports liquidity in the corporate bond market Bridges the gap between the retail and wholesale market Supports quality standards in corporate bond issuance Gemloc Advisory Services 11

Branding What role for the World Bank? Convening power global replication Creation of minimum standards Advisory services Gemloc Advisory Services 12

Insights from the Brazilian MoF 1) What are the main government objectives in supporting the Bond ETF industry in Brazil? 2) What are the main obstacles and key items in the agenda to launch issuer-driven Bond in Brazil? Gemloc Advisory Services 13