European exchange-traded funds (ETFs) could be one of the safest instruments to trade if post-trade transparency was improved, new research has found.
In attempting to debunk widely held fallacies between US and European ETFs, the report from finance training firm FinTuition and Howieson Consulting found that market structure issues, including the absence of a consolidated tape for European ETFs, were among the main reasons they had not developed alongside their American counterparts.
Roy Zimmerhansl, principal at FinTuition and co-author of the white paper, said the ability to create an ETF from the underlying assets offered a further layer of protection other instruments did not.
“The creation element means lending ETFs can be safer than other instruments because there is the extra protection of being able to create an ETF, or going back to the ETF provider and taking the underlying, which you can’t do for equities or bonds,” Zimmerhansl said.
The research, which was co-authored by former TABB Group consultant Andrew Howieson, found that market structure changes, including a consolidated source of post-trade data for ETF trades in Europe, could transform trading of the instruments in Europe.
“One of the most fundamental differences between European and US ETFs is how they trade, as ETF trades – both on and off exchange – are reported to the US consolidated tape.
“In Europe, ETFs are listed on multiple venues, so each exchange records their volume independently, which doesn’t accurately display the amount of fungible shares,” Zimmerhansl said.
The absence of a consolidated tape has the potential to skew average daily traded volume figures, which are the main reference point for lenders and custodial banks, which further put the instrument at a disadvantage.
The report also found demand for ETFs in Europe was linked to a lack of availability for borrowing to cover shorts and an inability to finance long positions for both hedge funds and their prime broker service providers.
European-wide regulation MiFID II currently being agreed upon by the European Parliament could incorporate ETF reporting, including trades done off-exchange, while ETF provider iShares, a subsidiary of Blackrock, recently teamed up with Bloomberg to offer an consolidated tape for ETFs that covers 22 European venues.
Last month, research from Credit Suisse indicated ETFs in Europe had shown spread improvements increasingly better than their underlying assets, which was making them more attractive to traders in Europe.