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Global Regulators Plan Standardized ETF Rules


The exchange traded fund universe is comprised of various asset categories and investment strategies. In an attempt to help investors differentiate between the growing range of products available, global regulators are working on a standardized framework for ETF rules.

The International Organisation of Securities Commissions (IOSCO) is seeking greater disclosure into specific risks associated with each type of ETF, along with improved transparency into fees and expenses, Reuters reports.

The proposals reflect “a shared consensus within the regulatory community as to how the regulation of ETFs should be approached,” IOSCO said in a report.

Regulators want to help investors distinguish between index-based ETFs and other “synthetic” ETFs – leveraged/inverse funds that rely on derivatives, or Undertakings for Collective Investments in Transferable Securities (UCITS) in Europe, , reports Joe Morris for Ignites. [Understanding Synthetic ETFs, UCITs and Counterparty Risks]

IOSCO wants  to impose new rules to force ETF managers to be more transparent about counterparty risks raised by their securities lending activities.

While not a pressing subject in the U.S., international regulators have voiced concerns that the lending practices could hurt investors and the financial systems. Most critics contend that the practice poses counterparty risk where a default of the security’s borrower could leave the ETF provider in a short squeeze. [How ETF Securities Lending Works]

Moreover, some critics also argue that ETF investors are not fully benefiting from securities lending while remaining fully liable to cover any losses. [ETF Securities Lending in Focus on iShares Suit]

Additionally, IOSCO is calling for a standardized disclosure on ETFs that track an index in terms of composition and performance.

For more information on the ETF industry, visit our current affairs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.