ESMA seeks preliminary views on the potential shape of future regulation of exchange-traded funds and structured UCITS …
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ESMA (European Securities and Markets Authority) publishes a discussion paper (ESMA/2011/220) setting out policy orientations on guidelines for UCITS Exchange-Traded Funds (ETFs) and structured UCITS. The Authority has reviewed the current regulatory regime applicable to such funds and considers that the existing requirements are not sufficient to take account of the specific features and risks associated with these types of fund. In the discussion paper, ESMA examines the possible measures that could be introduced to mitigate the risk that particularly complex products, which may be difficult to understand and evaluate, are made available to retail investors. In this document, ESMA also raises the potential systemic risk caused by these types of fund and their impact on financial stability. ESMA will use the feedback received to this paper to develop draft guidelines for such funds.
“Investor protection is one of the core missions of ESMA. With the publication of this discussion paper, we seek views on policy orientations to improve the transparency and quality of information provided to investors buying UCITS ETFs and structured UCITS. Also, specific safeguards need to be developed for activities like securities lending used by UCITS ETFs or for complex strategies pursued by some structured UCITS. However, in order to preserve the integrity of the UCITS brand and to protect investors, it cannot be excluded that it may be necessary for ESMA to issue warnings to retail investors about the risks of these products or even to limit the distribution of certain of such funds to retail investors. In this context, ESMA may need to ask for appropriate powers for inclusion in the relevant sectoral legislation.”
For ETFs, ESMA has identified the following topics for which guidelines should be developed and on which feedback is sought:
For structured UCITS, ESMA considers that guidelines should be developed with regards to total return swaps and strategy indices.
For structured UCITS gaining exposure to complicated investment strategies, ESMA believes that both the structured UCITS’ investment portfolio, which is swapped, and the underlying to the swap to which the UCITS obtains exposure, should comply with the relevant UCITS diversification rules. Also, the Authority thinks that the role of the counterparty of the total return swap should be subject to specific safeguards.
Source: ETFWorld – ESMA