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Esma unveils proposed rules for ETFs and Ucits
The prospectus of every exchange-traded fund should include clear details of the physical and synthetic investment policies, the European Securities and Markets Authority has proposed.
Outlining rules for greater transparency of ETFs and Ucits funds, the Esma said in a 78-page document that the proposals would protect consumers and limit risk.
Esma proposed allowing investors to redeem shares whether in the secondary market or directly with an ETF provider
The document said ETF providers should detail the amount of collateral they hold.
It said the annual and half-yearly reports of an index-tracking Ucits should state the size of the tracking error, while actively managed ETFs should inform investors that it is not a tracker and disclose how it will meet the stated investment policy.
Steven Maijoor, chairman of ESMA, said: “In outlining the draft future rules for investment funds, Esma is proposing to reinforce the legal framework applicable to ETFs and other types of Ucits.
“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.”
Julie Patterson, director of authorised funds and tax for the Investment Management Association, said: “We recognise that regulators remain concerned that some retail products are overly complex, but complexity does not necessarily equate to risk. Sophisticated investment strategies can maximise returns while minimising risk. Removing so-called complexity could lead to investors not having access to the investment returns they seek within the Ucits framework.”
Minesh Patel, owner of London-based EA Financial Solutions, said: “ETF providers need to make clear whether the product is physical or derivative based. ETFs do help to access markets that clients may not usually be able to.”
ETFs were put under the spotlight in 2011 after reports by the the FSA, the Bank of England and the Financial Stability Board. The regulators warned about synthetic ETFs which use derivatives to replicate indices or price movements.
