Euro regulator resists radical clampdown on ETFs

The regulatory body for the European Union has proposed stricter disclosure requirements on providers of exchange traded funds (ETFs), but has backed away from imposing more radical reforms on the sector.

A consultation paper published today by the European Securities and Markets Authority (ESMA) set out draft rules governing the sale and promotion of ETFs.

It proposes ETFs must disclose whether they lend out securities and give greater detail on the collateral they hold.

Investors must be informed via products’ prospectus, key facts documents and marketing literature how they will meet their stated investment policies, including any intention to outperform an index, ESMA proposes.

Some stakeholders had expected tougher proposals, including dividing ETFs into ‘complex’ and ‘non-complex’ groups and restricting the sale of derivative-based synthetic ETFs to retail investors. But the ESMA paper did not outline draft rules in these areas.

Instead, the guidelines, which follow a discussion paper issued by ESMA in July, aim to increase investor protection by upping providers’ disclosure requirements.

The ESMA paper proposes providers must explain their products’ risks fully and the mechanism by which they deliver returns.

Elsewhere, the paper said index-tracking UCITS must contain a description of their investment policy and provide sufficient detail in relation to the components of the index or the benchmark to which it refers.

“It is important investors are provided with sufficient detail to understand the index tracking policy used and the types of underlying assets and strategies they are gaining exposure to,” it said.

“Investors must always be informed of the principle risks in relation to the investment policy of the UCITS.”

The industry has until 30 March to respond. Rules are expected to be finalised and adopted in Q2 2012.


This article was first published on Investment Week

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