Global securities regulators have published a new set of principles for the regulation of exchange-traded funds (ETFs), which aim to address the specific features and risks of ETFs.
The board of the International Organization of Securities Commissions (IOSCO) published a final report today that proposes nine principles intended to guide the regulation of ETFs and foster industry best practices.
IOSCO says that the principles reflect extensive consultation between regulators and with the financial industry, and represent a “consensus within the regulatory community as to how the regulation of ETFs should be approached.”
IOSCO’s final recommendations focus on features that are specific to ETFs and deal with products that are structured as collective investment schemes (CIS), but not so-called exchange-traded products (ETPs). The recommendations are divided into two main sections: ETF classification and disclosure, and structural issues such as managing conflicts of interest.
The first section includes principles intended to clearly differentiate ETFs from other similar products; calls for the disclosure of fees and expenses, including the impact of securities lending on fund expenses; and calls for thorough risk disclosure too, particularly for ETFs that use complex strategies that may involve the use of leverage (or reverse leverage).
The second section focuses on issues related to the structuring of ETFs, including the management of potential inherent conflicts of interest and of counterparty risks arising from their replication methods. IOSCO also encourages regulators to consider imposing requirements to ensure that ETFs appropriately address risks raised by counterparty exposure and collateral management, it notes.
Additionally, the report stresses the importance of disclosure and conduct requirements (particularly product suitability) for ETF dealers.
IOSCO reports that ETF structures managed almost US$1.9 trillion in total assets as of January 2013, representing roughly 7% of the global mutual fund market. “This dynamic growth in ETFs has gradually attracted the attention of regulators, concerned about the potential impact of ETFs on investors and on the broader marketplace, as the industry has continued to evolve through diversification and the launch of new innovative products,” it notes.