IOSCO calls for industry views on ETF regulation

The technical committee of the International Organization of Securities Commissions (IOSCO), the international policy forum for securities regulators, has published a consultation report, Principles for the Regulation of Exchange Traded Funds.

The report examines key regulatory issues regarding ETFs. It also proposes 15 principles against which both the industry and regulators can assess the quality of regulation and industry practices relating to ETFs regarding investor protection, sound functioning of markets and financial stability.

The Consultation Report aims to address the concerns arising from the surge of interest in the sector and the potential impact of ETFs on investors and the marketplace.

The report proposes 15 principles that reflect a level of common approach and are a practical guide for regulators and industry practitioners. The proposed principles address ETFs that are organised as Collective Investment Schemes (CIS) and are not meant to encompass other Exchange-Traded Products (ETPs) that are not organised as CISs.

Fourteen of the proposed principles are categorized under the following three headings:

– ETF classification and disclosure;

– Marketing and sale of ETF shares; and

– The structuring of ETFs.

The report also considers the potential broader risks to financial stability arising from ETFs and other ETPs. It suggests that regulators should bear in mind that recommendations made for the ETF industry may be applied elsewhere to other areas of financial services.  

These potential broader risks include the following:

– Risks arising on secondary markets (the risk of shock transmission)

– ETFs and market integrity (risk of misconduct)

– Risks to financial stability

The 15th principle for the regulation of ETFs relates to the broader risk of liquidity shocks and transmission across correlated markets.

IOSCO’s Standing Committee on Investment Management is seeking comments on the proposed principles, as well as on the other specific concerns, such as the following:

 Do the principles adequately address the regulatory issues raised by ETFs?

 Are the potential financial stability issues raised by ETFs appropriately addressed?

 Is there a need for further analysis of issues not exclusive to ETFs, for instance, by the Financial Stability Board.

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