The European Securities and Markets Authority (ESMA), the region’s securities watchdog, is consulting the market on new guidelines for exchange-traded funds (ETFs) that extend beyond its initial discussion paper to include a wider range of UCITS instruments.
ESMA’s latest consultation proposes guidelines for synthetic and physical UCITS ETFs and detail obligations for index-tracking UCITS, efficient portfolio management, total return swaps and strategy indices for UCITS.
UCITS – or Undertakings for Collective Investment in Transferable Securities – are investment funds that have been approved for use across the European Union.
The guidelines include an obligation on UCITS ETFs to use an identifier to avoid confusion with other exchange-traded products and for investors to be given more information when a UCITS ETFs is actively managed rather than tracking an index.
ESMA is also seeking feedback on the appropriate regime for investors to redeem their shares, whether in the secondary market or directly with the ETF provider.
The watchdog has broadened UCITS guidelines to cover the use of total return swaps, including proposed rules on collateral and investment in strategy indices, where eligibility requirements have been tightened. For index-tracking UCITS, ESMA has proposed additional disclosure requirements relating to the index being tracked, the method of replication and the tracking error.
The guidelines also include securities lending and collateral management requirements for UCITS, with ESMA suggesting that collateral used to mitigate counterparty risk should comply with guidelines on risk measurement and calculation of global exposure and counterparty risk outlined by its predecessor the Committee for European Securities Regulators in July 2010.
“In outlining the draft future rules for investment funds today, ESMA is proposing to reinforce the legal framework applicable to ETFs and other types of UCITS,” said ESMA chair Steven Maijoor. “The aim of these guidelines is to enhance investor protection and limit the risk of certain practices by strengthening, in particular, the standards applicable to collateral received in the context of activities such as securities lending. Moreover, the proposed guidelines improve the quality of the information provided to investors to allow them to make informed investment decisions. Furthermore, the draft guidelines help address concerns arising from the increase in the number of complex products sold to retail investors and will contribute to the convergence of the regulatory framework for these products.” The regulator’s proposals are based on a July 2011 discussion paper that reviewed the UCITS directive’s treatment of ETFs. ESMA said at the time that its concerns related to a perceived lack of transparency and risks associated with the rapidly growing ETF market.
The comment period for the draft proposals will run until 30 March, with ESMA expecting to publish final guidelines by the middle of the year.