An authorized participant is an organization that has the right to create and exchange shares of an exchange traded fund (ETF). They provide much of the liquidity in the ETF market by obtaining the underlying assets necessary to build the shares of an ETF. If ETF shares are missing on the market, authorized participants create more. Conversely, authorized participants reduce outstanding ETF shares when the PRICE of the ETF is lower than the price of the underlying shares. This can be done with the creation and withdrawal mechanism that adjusts the price of an ETF to its underlying net inventory value (NAV). Authorized participants are the capital market intermediaries in the process of creating and withdrawing the ETF. This process is a key feature that distinguishes ETFs from their investment fund counterparties. Understanding the role of APS in the world of ETFs is essential for anyone who wants to launch any type of ETF. At the end of the day, both sides benefit from cooperation.
The sponsor receives assistance for the creation of the fund, while the participant receives a block of shares that is resold for a profit. This process also works the other way around. Authorized members will receive the same value of the underlying security in the Fund after the sale of shares. Licensed participants make most of their profits in the ETF market through arbitration. An ETF distributor and an AP sign an agreement that « authorizes » the AP to create and exchange shares with a specific ETF. ETF shares are available for the establishment and reimbursement of certain amounts that include a « production unit. » A typical creative unit is 50,000 ETF shares; With an share price of $25, this would represent $1.25 million of ETF shares. Retail investors cannot become authorized participants. Any full-service NSCC member who has entered into an agreement on authorized participants with an ETF agent and distributor/sponsor to become an authorized participant may use NSCC`s ETF processing service.
Several authorized participants help improve the liquidity of a specific ETF. Competition tends to keep the exchange of funds close to their fair value. More importantly, other authorized participants are helping to make the market work better. When one party ceases to act as an authorized participant, others see the ETF as a winning opportunity and offer to create or exchange shares. At the same time, the authorized participant concerned has the opportunity to address all internal problems and resume primary market activities. Authorized participants increase market transparency by keeping etf prices close to their net inventory values. When most investors buy an ETF, they want to bet on a certain asset class. The most obvious thing is that someone who buys a total stock market ETF hopes that stock prices will rise.
Typical investors do not want to check whether the funds are acting above or below their net inventory values. However, some long-term investors prefer closed funds because of the occasional possibility of finding steep discounts. In practice, authorized participants ensure that premiums and discounts never become too large in the ETF market. Traditionally, big banks such as Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) are eligible. They receive no compensation from a sponsor and are not legally required to exchange or create et al.A. shares. Instead, authorized participants are compensated by activities on the secondary market. This authorized participation agreement (the « agreement ») is entered into by and between DFA Securities LLC (the « trader ») and the « participant ») and is subject to acceptance by Citibank, N.A. (the « Transfer Agent ») and the Agreement of Dimensional ETF Trust, a Delaware legal trust (the « Trust ») that offers a number of securities portfolios (one « fund » each and one fund) exclusively for Sections 4 (c) and 13 c).