The European Fund and Asset Management Association has published a Comment Paper noting that regulatory concerns around liquidity and counterparty risks in ETFs are "misplaced" - in response to the European Central Bank's findings in November 2018 on such risks.
Among the key points addressed in the Paper is that Efama believes the liquidity in the depth of the secondary market is overlooked.
"This acts as an additional 'layer' of liquidity when compared to ordinary mutual funds," Efama states, adding that there is evidence this helps cushion against sudden market shocks, facilitating share redemptions and trading in underlying securities by authorised participants.
Regarding synthetic ETFs and the use of swaps, Efama notes that Ucits and Emir regimes implement "strict collateral rules"; while the industry overall has benefitted from the use of multiswap counterparty platforms.
And while regulatory work, such as the thematic review led by Iosco is welcome, the Association notes that "any further regulatory action should be carefully calibrated based on evidence, [and] a clearer undersanding of the interaction between ETFs and their broader ecosystems."
"Considering the existing regulation, as an example, we note that the recent Mifid II reforms are gradually contributing to greater price transparency and to deeper pools of secondary market liquidity to the benefit of ETF end-users."
"We also believe there is need for a proper classification system, capable of introducing a clear distinction between ETFs - which in Europe are essentially Ucits licensed products - and other exchange traded products - ETPs. Such [a] scheme is intended to help investors more readily assess the risks inherent to each type of ETP, as well as aid regulators to better focus their efforts at protecting investors and guarding financial stability."
Click here to read the full Comment Paper: