Regulating ETFs: IOSCO's global perspective

Since their appearance in the early 1990s, ETFs have grown to become successful investment products. Looking at the decade 2002-2012, assets managed under ETF structures grew from US$142 billion to US$1.8 trillion, with the number of products going from 283 to 3,339 over the same period. North America emerges as the largest market of listed ETF products (US$1.3 trillion), followed by Europe (US$350 billion).
These dynamics have naturally come to the regulators’ attention. Already in 2008, acknowledging the rise of the industry, IOSCO began work on ETFs, leading the way for further regulatory changes. IOSCO analysed ETFs’ specific features with a view to develop a common regulatory approach across jurisdictions. In 2011, other international institutions (e.g. BIS and the FSB) started looking more closely at this fast growing market. This increased focus has led the ETF industry to engage more with regulators. The gradual maturation of this global debate on ETFs has produced a two-fold effect: First, it has spurred regulatory amendments to existing legislation in a number of jurisdictions, as in the case of Europe with the elaboration of ESMA’s Guidelines on ETFs and other UCITS issues published in December 2012. Second, it has brought ETF providers to gradually adjust their disclosures and product offer to take into account some of the concerns expressed by regulators and investors (e.g. providing investors with access to “live” information on their ETFs’ portfolio components via their website).

“IOSCO particularly encourages a clearer  differentiation between ETFs and other non-fund exchange-traded products (ETPs), such as notes (ETNs) and commodities (ETCs),..”

IOSCO’s recently published report on Principles for the Regulation of ETFs represents a key development in the global debate since it outlines a set of minimum global standards for the regulation of ETFs. The Principles focus on two major aspects of ETFs namely the disclosure and structuring of these products. Regarding disclosure, IOSCO particularly encourages a clearer  differentiation between ETFs and other non-fund exchange-traded products (ETPs), such as notes (ETNs) and commodities (ETCs), as regulators remain concerned as to investors’ confusion between these competing products. Further recommendations aim to foster increased disclosure of the chosen index, of the ETF’s replication techniques and features (e.g. physical or synthetic, leveraged or inverse, etc.), as well as of all incurred fees and costs (including those from the material lending of securities). IOSCO further stresses the need to properly address conflicts of interest which may arise in the different ETF structures. Lastly and importantly, IOSCO also highlighted the risks inherent to counterparty exposures and inadequate collateral management and formulated recommendations on ways to address those risks both for physical ETFs and synthetic ETFs.

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