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Mifid II promises a new era for European ETF trading

by Emma Dunkley on Dec 28, 2012 at 07:00

In Europe, the majority of ETF investors are still institutional, which is why the OTC market is so big. ‘When you want a significant size of ETFs, instead of going on-exchange you go via a market-maker over the counter,’ says Alain Dubois, chairman of Lyxor Asset Management.

‘It’s important we have transparency on this process because the figures we get on exchange don’t show the OTC figures. Transparency in general is a good thing; liquidity is very important – the size and depth of the market, and the bid/offer spread.’

He adds that bid/offer spreads are significant costs and could end up being greater than the annual charge, especially for investors who sell after only a few months.

Another factor that will enhance trading and liquidity in Europe is the move to ban commission or inducements to advisers.

In a paper entitled Restoring investors’ trust in Europe’s markets, chairman of the European Securities and Markets Authority Steven Maijoor says: ‘Getting the incentives right for providing good advice to clients is in all our interests. I therefore hope the European Union will follow the example of some member states, including the UK, and move to ban inducements.’

Maijoor also says he fully supports the ban on inducements in certain situations as included in the proposal by the commission for Mifid. ‘At a minimum we need to ban inducements in the case of discretionary portfolio management and when an adviser wants to use the independent label,’ he says.


Liquid assets

ETF proponents agree a Europe-wide ban of inducements would boost the industry, as these products, which have not paid commission, have typically been ignored in such instances.

Fuhr says: ‘This will also help liquidity because they [advisers] will be able to embrace ETFs more.’ This will especially be the case as advisers find it tougher to find actively managed funds that can actually deliver alpha and justify their higher fees.’

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