ICMA Defends ETFs
The International Capital Market Association said the Central Bank of Ireland should focus on possible flaws in the structure of exchanges rather than risks which have been suggested as inherent in the design of exchange-traded funds.
In May the Central Bank has published a discussion paper on ETFs as part of its role in maintaining stability and protecting consumers.
Gerry Cross, director of policy and risk at the Central Bank of Ireland, said in a statement: “ETFs are the most important product development the investment funds industry has seen in the last 20 years – this is evident from their exponential growth. This discussion paper sets out the results of substantial research conducted within the Central Bank of Ireland on the growth of ETFs.”
In the first half of this year, a record $391.3bn (€334bn) in net inflows were invested in ETFs/ETPs listed globally, greater than the net inflows in the whole of last year, according to ETFGI, the independent research and consultancy firm. Assets invested in ETFs/ETPs listed globally increased to a record $4.279 trillion with Europe reaching a record $686bn.
ICMA’s Asset Management and Investors Council, which represents buyside members of the trade organisation, said in its response to the Irish central bank that it did not believe the CBI took sufficient account of the Esma 2012 Guidelines in its analysis and questions. The European Securities and Markets Authority published guidelines for national regulators and Ucits management companies on ETFs in 2012.
“We do not consider that there are risks unique to an ETF which are not already addressed by the Ucits and MiFID frameworks,” added ICMA. “Most of the public and regulatory concern about ETFs, such as the alleged “liquidity illusion”, stem from a lack of understanding about the peculiar characteristics of ETFs, as opposed to traditional open-ended funds.”
ICMA agreed that much of the academic research on ETFs has been focussed on the US and it would be helpful to study European conditions. MiFID II, the regulation coming in force in January in the European Union, introduces trade reporting requirements for ETFs, which will make it easier to gather data in the region.
“We regret, nevertheless, the slow progress towards the development of a true European consolidated tape which would bring benefits to investors in assessing the liquidity of ETFs in European markets and to investors in terms of greater understanding of how market events may affect European ETF liquidity,” added ICMA.
In contrast to the US, in Europe 70% of all ETF volumes trade off- exchange, and ICMA said this key difference is worth considering during the policy debate of ETFs. In addition, ETF liquidity in Europe is fragmented between 25 different exchanges.
ICMA continued there is also an insufficient focus on some of the short-comings of the market micro-structure around ETFs which can affect the pricing of underlying securities in volatile trading conditions, and have a knock-on effect on the liquidity of an ETF’s secondary market.
For example, abnormal trading sessions, market closures and use of circuit-breakers have in some instances forced exchanges to temporarily suspend trading for certain ETFs. However in other instances, ETFs acted as a price discovery tool even when exchanges had halted trading in underlying securities.
“So, ETF suspensions often and more appropriately reflect possible flaws in the (micro) structure of exchanges, not risks inherent to the ETF product itself,” said ICMA. “We would encourage the CBI to carefully take these episodes into account, suggesting there are more appropriate ways to address investor concerns without addressing the ETF product design into question via future policy actions.”
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