What Regulators are Looking at in ETFs

ETF Trends

Exchange traded funds have come under fire in the media over the past year with some market observers trying to scapegoat ETFs for higher volatility and correlations in the markets. Regulators have examined ETFs but there has been no evidence of improper trading or other activities.

“Commission staff is currently engaged in a general review of exchange-traded products in connection with, among others, the adequacy of investor disclosure, liquidity levels and transparency of underlying instruments in which ETPs invest, fair valuations, efficiency in the arbitrage process and the relationship between market volatility and ETPs,” Eileen Rominger, director of the SEC’s Division of Investment Management, said in October, reports Randy Diamond for Pensions & Investments.

Back in March 2010, the SEC suspended approval on derivatives-based ETFs, such as leveraged ETFs or actively managed ETFs that utilized futures, options or swaps, while it looked over the impact of derivative-based ETPs.

“Based on recent testimony and comments from the SEC staff, it appears that the staff is revisiting a wide range of fundamental ETF issues,” Michael Mundt, a partner at law firm Stradley, Ronon, Stevens & Young LLP, said in the article. “I would expect this review to delay consideration of new types of ETFs for the immediate future.”

Still, sources close to the agency believe that the latest ETF review is too broad in nature and would unlikely result in new regulations over the next year, Diamond noted.

In Europe, the European Securities and Markets Authority is expected to finalize regulations on ETF disclosure rules, especially on the collateral they hold, to help prevent another UBS incident. [‘Rogue’ ETF Trader Causes UBS To Lose $2.3 Billion]

Additionally, the ESMA is even trying to ban the sale of complex, or “synthetic,” ETFs that use derivatives and account for 40% of ETFs available to European retail investors.

“ESMA reiterates the need to tackle these issues and will continue to contribute actively to the regulatory response to these problems, which will come in a new version of the EU Markets in Financial Products Directive,” Reemt Seibel, the authority’s communications officer, said in the article.

BlackRock , which does not offer derivatives-based inverse/leveraged ETFs, proposed to classify the fund type as exchange traded instruments, or EFIs. [BlackRock’s Fink Worried About Leveraged ETFs]

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

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