Authorized participant

Authorized Participant

An institutional investor that takes part in the creation of an exchange-traded fund (ETF). An exchange-traded fund is an investment company that tracks all the stocks on a particular exchange. When an ETF is created, an authorized participant buys the shares that are to underlie it and gives them to the fund's sponsor in exchange for units (or shares) in the new ETF. The authorized participant then sells these units to investors. Authorized participants are handpicked by the sponsor of the ETF.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Authorized participant.

An authorized participant is an institutional investor who takes part in the creation of exchange traded fund (ETF) shares.

The ETF sponsor selects authorized participants to assemble creation units, which are baskets of securities in the index that underlies the ETF. Each creation unit corresponds to a fixed number of shares in the ETF.

The authorized participant transfers the creation unit to the ETF sponsor in exchange for shares in the ETF, which can then be sold to other investors. Authorized participants may also redeem ETF shares by trading them back to the ETF sponsor for corresponding baskets of securities.

Since ETFs exchange shares only for corresponding baskets of securities and don't buy back shares investors wish to sell, they don't have to keep cash on hand or liquidate securities to meet redemption demands. As a result, ETFs are able to track the underlying index more closely and achieve tax efficiency.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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According to PwC, ETFs will be required to adopt a written liquidity risk management program designed to manage and assess liquidity risks, including the effectiveness of ETF arbitrage, authorized participant activity and the composition of creation and redemption baskets.
Refran said the PSE will also remove the paid up capital requirement for an authorized participant provided that it is not a market maker.
Instead, certain financial institutions known as authorized participant (AP) purchase and redeem ETF shares directly from the ETF in creation units.
That is, the authorized participant has to bring a scaled replica of the ETF's portfolio to receive the corresponding number of shares.At redemption, the participant is again paid in the assets of the portfolio.
Modern monitoring systems share the collected information in graphical trend and table data format for any authorized participant. Graphical interfaces can be seen with a normal web browser from any PC in the company's Intranet.
Instead, ETFs receive a defined "Basket" of assets from "Authorized Participants." Banks and brokerage houses acting as Authorized Participants contribute the Basket to the ETF and in turn receive "Creation Units" priced at net asset value from the ETF Trustee.<br>The Authorized Participant then sells the new units to investors at an intraday premium does not show up during the day and the advertised price of the ETF is brought back to NAV at the end of the day.
An authorized participant (AP) or market maker would create a tracking basket, not too unlike an index, while near real-time indicative values can be disseminated.
Wedbush served as the clearing firm for its broker-dealer customer, Scout Trading LLC, and acted as an authorized participant of various ETFs.
Instead, a market maker or authorized participant takes a buy order and can go directly to the ETF sponsor to create new shares of the ETF.
(marketplace, custodian and authorized participant).

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