ETF guidelines published by the European Securities and Markets Authority (ESMA) have been welcomed by EDHEC-Risk Institute, which says they are consistent with its responses to the Authority's consultation earlier this year.
ETF guidelines published by the European Securities and Markets Authority (ESMA) have been welcomed by EDHEC-Risk Institute, which says they are consistent with its responses to the Authority’s consultation earlier this year.
However, in two areas ESMA has gone much further than industry participants expected, EDHEC said.
The first is in the area of securities lending, where the guidelines indicate that all profits from lending should be returned to the fund.
“It is clear that this subject comes as a surprise to industry participants,” EDHEC said.
“Nobody thought that ESMA would go as far as it did on the subject. This new rule clearly changes the situation and the business model of ETF providers who have chosen physical replication because securities lending represented considerable sources of revenue for the asset management firms.”
“These revenues did not correspond to disproportionate profits but allowed ETFs to show lower management fees. As a result of receiving all of the lending profits, the ETF can now expect its management fees to increase; the arrangement will nonetheless have the merit of clarifying the real costs of replication and the profits associated with the risk taken in the area of securities lending.”
The second area of surprise is on the issue of the domain of financial indices. ESMA seems intent on forcing indices providers to offer up full information on methodology, which hitherto may have been restricted on the basis of intellectual property arguments.
“ESMA’s position is quite logical given the importance of indexed investment and the fact that it seems difficult for a provider to claim that their indices are a reference without giving exhaustive information on that reference,” EDHEC said.
“It is clear that ESMA’s desire to make the compositions of indices freely available, if it materialises through the availability of all of the historical compositions of the indices, will have significant consequences for the business model of index providers, some of whom draw a considerable share of their revenues from the sale of data.”
Further technical analysis of ESMA’s guidelines by EDHEC-Risk Institute is available here: Guidelines on ETFs and other UCITS issues