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March 15, 2012 6:54 pm
The International Organisation of Securities Commissions (Iosco), the umbrella body for the world’s market regulators, has published a set of broad principles that aim to establish best practice standards for the exchange traded funds industry.
Iosco’s consultation paper, published on Wednesday, concentrates on improving transparency standards and disclosure requirements, building on work being done by a range of regulators in response to the rapid growth of the ETF industry worldwide.
Iosco proposed 15 principles for ETFs as a framework for market participants and regulators but it also emphasised that it was not advocating a one-size-fits-all approach. It said some of the suggested guidelines could be better viewed as industry best practice rather than regulatory requirements. The responsibility for the implementation of any new rules still lies with national regulators.
Last year, numerous national and international regulators expressed concerns about ETFs with the Financial Stability Board, the body that co-ordinates financial regulators, International Monetary Fund and Bank of International Settlements all issuing critical reports.
In Europe, the European Securities and Markets Authority (Esma) is currently evaluating industry responses to new draft guidelines for ETFs and other Ucits funds published in January.
One ETF expert noted that Iosco’s principles apply only to exchange traded funds. Although Iosco called on regulators to encourage disclosures to help retail investors clearly differentiate ETFs from other types of exchange traded products, Deborah Fuhr of ETF Global Insight, said it should have gone further.
“There is the potential for confusion as some investors do not always understand that there can be differences in terms of tax, administration and counterparty risk exposures between ETFs and other types of exchange traded products.”
Ms Fuhr also said Iosco’s and other regulators’ focus on exchange traded funds while ignoring other types of exchange traded products illustrated a lack of consistency in their approach.
The Iosco paper also indicated that some of the most acute concerns expressed by regulators about the possible systemic risks associated with ETFs are now viewed as part of broader issues for consideration.
For example, it said the FSB’s complaint in April 2011 about the risks to global financial stability posed by the increasing opacity and complexity of ETFs highlighted issues that were not exclusive to the ETF industry and therefore needed to be addressed from a broader perspective.
Iosco also noted that securities lending, another concern highlighted by the FSB, was not an issue specific to the ETF industry but a widespread practice. The systemic implications of securities lending needed to be better quantified, said Iosco, which also noted that both Esma and the FSB were currently working on policy recommendations in the area.
Iosco said regulators should also assess whether current rules addressed potential conflicts of interest raised by ETFs. It raised the issue of market makers being authorised or de-authorised to trade by an ETF provider and whether this might have an impact on fair pricing.
It also noted that transparency for ETF trading varied in different countries, depending on how much business is done in over-the-counter bilateral deals, rather than on exchange. Iosco said regulators should upgrade their monitoring of trading flows and consider whether to establish an audit trail system to improve their market surveillance capabilities.
The closing date for comments on the consultation paper is June 27 and Iosco will publish a follow up paper later in the year.
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