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Peter De Proft, director general of Efama

EFAMA responds to FSB note on potential financial stability issues arising from ETF trends


EFAMA has respond to the Financial Stability Board’s (FSB) note on potential financial stability issues  arising  from  recent  trends  in  Exchange-Traded Funds (ETFs) stressing that a large majority of European ETFs are UCITS, and the UCITS  Directive  provides  a  robust  regulatory  framework  for investment funds, with  strong  risk  mitigation  provisions.

The UCITS Directive is one of the world’s most respected and widely recognized regulatory regimes for investment funds, and it largely addresses the concerns expressed by the FSB. Asset segregation, risk management, conflict of interest rules, investment limits, collateral rules for OTC derivatives and disclosure requirements are key elements of the UCITS regime, and will be even further strengthened by the UCITS IV Directive from 1 July 2011.

EFAMA fully supports  initiatives  to  increase  the understanding  of ETFs,  but the  areas  of  concern  in  the Note  are  not  unique  to ETFs, and regulators should look at other products as well, especially when
focusing on systemic risks.

EFAMA believes that appropriate distinctions should be made among ETFs (by jurisdiction), and between ETFs and other non-fund exchange-traded products (ETPs), due to the differences in regulatory frameworks and different levels of investor protection offered. In particular, ETFs are often confused with other ETPs (such as notes and certificates), and more investor education is required to correct some of the misunderstandings.

ETFs are highly valued by investors for their features — particularly intra-day liquidity through exchange trading — and the low investment costs. They have been very successful in recent years and enjoyed fast growth, but the ETF segment remains still a very small percentage of the overall investment fund market.

Commenting on EFAMA’s response to the FSB, Peter de Proft, Director General of EFAMA, said: “EFAMA welcomes a constructive dialogue with regulators with respect to ETFs and agrees with the  need for transparency to investors regarding investment strategies, synthetic or physical replication, and collateral/fund assets composition. Besides the extensive requirements of the UCITS Directive, UCITS ETF providers already provide for a higher level of transparency on fund assets and swap exposure via their websites on a voluntary basis.”

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