Authorised participant
A dealer permitted to create and redeem ETF shares with the fund, usually in exchange for baskets of the underlying securities. Their arbitrage keeps the ETF's price close to net asset value.
Where you will meet it
Authorised participant appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain mutual funds and how they differ from other pooled investment vehicles
“Exchange-traded funds also trade on an exchange throughout the day, but authorised participants can create and redeem shares, usually in kind, which keeps price close to NAV and tends to make ETFs tax-efficient.”
- Explain how ETF shares are created and redeemed and what role authorized participants play
“ETF shares are created and redeemed in the primary market by authorised participants, broker-dealers under contract with the sponsor.”
- Set out how ETF shares change hands on the secondary market
“Liquidity therefore comes in two layers: the visible on-screen volume in the ETF, and the liquidity of the underlying basket, which market makers can tap through creations and redemptions by authorised participants.”
- Set out why an ETF can trade above or below its NAV
“Arbitrage by authorised participants usually keeps the gap small, but it can widen when the NAV itself is stale or when creating and redeeming is costly.”
See also
Arbitrage · Exchange-traded fund · Net asset value
Practise it
Practise authorised participant until it is automatic: questions that explain every wrong option.
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