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ASIC releases exchange traded funds report


The Australian Securities and Investments Commission has released a report on exchange traded funds (ETFs) which outlines how this growing industry is regulated in Australia and the impact of proposed international principles to address concerns by overseas regulators. 

Report 282 Regulation of Exchange Traded Funds ( REP 282), explains ASIC’s current understanding about the operation of ETFs and ongoing work in this area.

ETFs can provide a convenient and low-cost way for investors to diversify and receive returns close to the performance of market indexes or other assets, often with lower fees than traditional managed funds. But while standard, ‘physical’ ETFs generally invest in the underlying investments they are designed to track, ‘synthetic’ ETFs also use derivatives, such as swap agreements, to achieve similar outcomes. Benefits to investors of synthetic ETFs may include access to new and varied asset classes and low performance ‘tracking error’. Downsides include increased complexity and counterparty risk.

ASIC Commissioner Greg Tanzer, says: ‘Identifying the regulatory risks arising from potentially complex financial products, such as ETFs, is part of ASIC’s role to promote confident and informed investors and fair and efficient financial markets. ASIC has a range of regulatory powers relating to ETFs that help to promote these objectives.’

The ETF industry attracts significant funds. As at 2012, approximately $4.3 billion, based on ASX data, is invested in ETFs in Australia, with a high level of retail participation (50-75% across most types of ETFs). The ETF industry continues to expand at a rapid rate in Australia, with new types of ETFs and new issuers continuing to emerge.

ASIC has been monitoring the ETF industry closely, which is consistent with the approach taken by regulators in other key jurisdictions. The report explains how the domestic regulatory framework covers proposed principles that the International Organisation of Securities Commissions (IOSCO) has issued for consultation.

ASIC works closely with its international counterparts on issues such as ETFs and has recently engaged with international consideration of complex retail investment products more broadly, with ASIC Chairman Greg Medcraft co-chairing the newly established IOSCO Task Force on Unregulated Markets and Products’ Working Group on Retail Structured Products.

‘The regulation of ETFs in Australia is in line with proposed international standards and reflects consideration of the issues identified in IOSCO’s consultation. Our view is supported by surveillance of current ETF issuers in Australia and discussions with industry participants,’ Tanzer says.

‘In developing this report and considering how to use our powers, we have been involved in ongoing consultation with the ETF industry and will continue to liaise with the industry in the future, including with the ASX in relation to their rules on ETFs.

‘In addition we conducted surveillance visits on the current ETF issuers, and will continue to watch this area closely to help reduce some of the complex regulatory risks that continue to emerge.’

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