The new guidelines, which are designed to reinforce IOSCO’s ETF Principles published in 2013, came following a review of ETF markets, which produced positive results.
“No major gaps have been identified, and no major regulatory issues were reported by IOSCO members or industry participants,” the report said.
However, the report noted there has been rapid development in the market since 2013, such as the advent of “new products with exposures to less liquid and more novel asset classes and more complex investment strategies”.
Recommendations
As part of the report, IOSCO stressed the important role that authorised participants have in the market, arguing against “exclusive arrangements” between them and ETF issuers.
Furthermore, the report emphasised the need to conduct due diligence on authorised participants and market makers, both when onboarding and on an ongoing basis.
The report explained: “The effectiveness of the arbitrage mechanism and liquidity provision is largely dependent on the robust participation of APs and market makers.
“As a good practice, responsible entities are encouraged to avoid exclusive arrangements with APs and MMs if they may unduly affect the effectiveness of the arbitrage mechanism.”
It also pointed to recent significant periods of market stress, such as the coronavirus pandemic, and stated that while ETFs had “remained relatively resilient” in these periods, some fixed income ETFs “have displayed more significant or more persistent discounts and spreads”.
Additionally, some products, such as those following complex strategies or investing in less-diversified assets, have “experienced more significant volatility and operational challenges during times of stress”.
However, it was keen to emphasise that beyond these exogenous shocks, “no structural issues related to ETFs have been identified that have had a bearing on financial stability”.
The report also touched on the question of non-transparent ETFs, with IOSCO recommending that regulators ensure market participants have full information to enable effective arbitrage.
“IOSCO has observed that different jurisdictions require a combination of portfolio information disclosure, all of which recognise the need to provide investors and other market participants with sufficient information to value an ETF in a timely and accurate manner and to determine whether an arbitrage opportunity exists,” it said.
“With the publication of these good practices, IOSCO ensures that its policy framework for ETFs remains up-to-date, particularly in light of significant market developments since the publication of IOSCO’s ETF principles,” concluded Jean-Paul Servais, chair of IOSCO’s board.
