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Swap-based ETF issuers breathe sigh of relief at new rules

by Emma Dunkley on Jan 31, 2012 at 07:01

Swap-based ETF issuers breathe sigh of relief at new rules

Swap-based exchange traded fund (ETFs) providers have welcomed the new draft rules from the European regulator which have not singled out synthetic ETFs as many feared.

The guidelines published by the European Securities and Markets Authority (ESMA) did not target ETFs which use a swap to deliver the return, but instead addressed some of the main risks relating to all ETFs as well as other Ucits products, such as index trackers.

However, in July last year, ESMA warned it may curtail the distribution of these funds to retail investors after it branded some of them particularly ‘complex’.

In response to ESMA’s consultation last year, the European Systemic Risk Board, chaired by Jean-Claude Trichet (pictured), even suggested the possible withdrawal of the Ucits label from ‘complex’ and ‘opaque’ ETFs, to ensure that Ucits products remain simple.

But yesterday’s paper has largely been welcomed by swap-based ETF providers whose products have been considered in line with their physical counterparts, as well as other index-tracking funds under the Ucits umbrella.

Viewed on a more level playing field in this sense, it is clear that the counterparty risk stemming from the swap component has not been targeted as the sole form of risk. Instead, all Ucits index trackers have come under the spotlight, to reveal that other forms of risk, ranging from securities lending through to tracking error, should also be considered.

Within the consultation the two main points that stand out for ETF providers concern securities lending and collateral, as well as tracking error.

Alain Dubois, chairman of Lyxor, said: ‘This is an excellent consultation and we support all the proposals ESMA has made.

‘The final conclusion is that there is no need for specific ETF regulation and that Ucits is a framework that should be looked at as a whole. But only limited adaptations of the current framework is needed.’

Dubois said: ‘One of the most important proposals is over securities lending. This is significant because it is the first time Europe will be regulating securities lending.

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