AUSTRALIA: ASIC Outlines Room for Improvement for its Exchange Traded Products

Friday August 3 2018

ASIC’s review found that ETP market was performing well and that the products met the low cost and liquidity expectations of investors. Nevertheless the review outlined a variety of risks that necessitate monitoring by issuers and oversight by market operators.

The large and growing investment in ETPs incited ASIC to look at a number of the key premises and functions of the ETP market. The major risk found was the possibility for the bid/offer spread to briefly widen resulting in investors paying a spread that would be considered too high and undermining the relatively low cost proposition of some ETPs. Additionally ASIC findings revealed the need for market operators and issuers should play a more proactive role in monitoring the performance of ETPs, including liquidity in the market, and where they observe spreads widening unreasonably, they should take appropriate action.

ASIC is also recommending that ETP issuers publish the indicative net asset value (iNAV) with a frequency that enables investors and financial advisers to make more informed decisions.
Another area of concern identified in the report was market maker concentration, as although there are an increasing number of new entrants in Australia that serve a growing market, most liquidity is still provided by only two entities. ASIC expects issuers and market operators to be aware of this risk and incorporate a means of managing it into their risk management framework.

While not many ETPs have closed in Australia to date, ASIC encourages issuers and market operators to develop policies for reviewing, and where necessary remove from quotation with an orderly wind down, ETPs that may not meet ongoing suitability for quotation, such as very small ETPs that may be uneconomical to operate.

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