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The Canadian Securities Administators’ (CSA) review of the ETF regulatory regime is wrapping up.

“We are considering the preliminary results of our analysis of the ETF market, including assessing secondary market activity and factors that may affect their liquidity and trading,” said Ilana Kelemen, senior strategic advisor with the CSA, in an email. “This research is being used to inform our review of potential gaps or enhancements of the regulatory regime for ETFs.”

Kelemen said the CSA expects to complete its review by fall 2024 and publish a consultation paper in 2025.

Stakeholders will have “the opportunity to comment on our review and any preliminary policy proposals before any specific rule changes are proposed,” she added.

The CSA began examining ETF regulation in August 2023, with the goal of assessing adequacy of the existing regime.

At the time, industry observers believed the regulators launched the review largely as a policy checkup to ensure that ETF regulation is fit for purpose. The CSA had previously completed an exercise to modernize mutual fund product regulation.

The review comes as ETFs hold a growing share of the investment fund market.

According to the Investment Funds Institute of Canada, ETF AUM totalled $429.2 billion as of May 31 (compared with almost $2.1 trillion in mutual funds), accounting for roughly 20% of investment fund assets in Canada. That’s up from 18% a year prior.

Concurrent with the ongoing review, CSA members examined independent review committees (IRCs). All investment funds in Canada — including ETFs — must have an IRC, which evaluates any potential conflicts brought to them by a fund manager.

In March the Ontario Securities Commission and the Autorité des marchés financiers released results from a continuous disclosure review that focused on the IRCs of investment funds operated by 24 fund managers. The review suggested IRCs broaden their definition of conflicts of interest and refresh their ranks more frequently.

ETF regulation has also caught attention outside Canada.

In May 2023 the International Organization of Securities Commissions (IOSCO) published the results of a review, which concluded that the global principles for ETF regulation — finalized in 2013 — remain sound.

“No major gaps have been identified, and no major regulatory issues were reported by IOSCO members or industry participants,” the report said.

The CSA has indicated its review will examine some of the same areas IOSCO covered, including the process of creating and redeeming ETF units, the arbitrage mechanism that aligns an ETF’s trading price with the underlying value of its portfolio holdings, and the use of volatility controls (such as circuit breakers) in secondary market trading.

With files from James Langton