The International Organisation of Securities Commissions (IOSCO) has finalised its ETF Good Practices which encourage regulators and the ETF industry to monitor the role of authorised participants (APs), enhance the usefulness of the iNAV and consider appropriate disclosure requirements.
The ETF Good Practices, which are designed to reinforce IOSCO’s ETF Principles published in 2013, provide local regulators such as the Central Bank of Ireland (CBI) with a set of practices to adhere to.
Following a review of the global ETF market, IOSCO said the ETF Principles remain relevant despite the rapid growth of the space over the past decade.
Jean-Paul Servais, chair of the IOSCO board, said: “With the publication of these ETF 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.”
As part of the ETF Good Practices, IOSCO highlighted the crucial role APs play in ensuring ETFs trade as efficiently as possible.
In particular, the global watchdog called for ETF issuers to avoid “exclusive arrangements” with APs and market makers, especially if this impacts the arbitrage mechanism.
It also stressed the importance of conducting due diligence when onboarding APs and market makers as well as monitoring them on an ongoing basis.
“The effectiveness of the arbitrage mechanism and liquidity provision is largely dependent on the robust participation of APs and market makers,” IOSCO stressed.
“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.”
Elsewhere, for regions that still use the intraday net asset value (iNAV), IOSCO encouraged regulators and trading venues to improve its “accuracy and usefulness”.
Earlier this week, ETF Stream revealed Euronext is set to stop using the iNAV as the reference price to trigger halts on ETFs because of the operational inefficiencies caused.
IOSCO said: “Questions have been raised about the accuracy and reliability of iNAVs, noting possible limitations due to stale pricing, differences in time zones and the fact that they may not be published at sufficient frequency for professional traders.
“Regulators or trading venues are encouraged to consider reviewing the merits and limitations of iNAV and consider whether and how it could be used to support investors in valuing an ETF.”
Finally, when considering the question of non-transparent ETFs, IOSCO encouraged regulators to ensure market participants have the right information to facilitate effective arbitrage.
Europe currently requires ETFs to disclose their holdings on a daily basis while the US have adopted a variety of non-transparent ETF models after the Securities and Exchange Commission (SEC) changed the regulation in 2019.
“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,” the global watchdog explained.
