INTERNATIONAL: IOSCO Publishes Principles for the Regulation of ETFs

Thursday June 27 2013

The Board of the International Organization of Securities Commissions today published the final report on Principles for the Regulation of Exchange Traded Funds (ETFs), containing nine important principles intended to guide the regulation of ETFs and foster industry best practices in relation to these products.

The report is structured in two main sections. The first section concerns ETF classification and relevant disclosures for investors, including principles intended to clearly differentiate ETFs from other non-CIS ETPs, as well as from other CIS. Important in this regard is that investors are able to appreciate both the similarities and differences of ETFs with other competing products, as well as the way ETFs achieve their investment objective and the quality of their performance typically vis-à-vis a reference index. Further principles encourage the disclosure of related fees and expenses, including the eventual impact of securities lending on these, as well as complete, accurate and understandable disclosure to address the types of risks investors may be exposed to particularly through ETFs using complex strategies that may involve the use of leverage (or reverse leverage).

The second section addresses concerns tied to the structuring of ETFs as such, including the management of potential inherent conflicts of interest and of counterparty risks arising from the two main types of replication methods: physical and synthetic. IOSCO encourages regulators to consider imposing requirements to ensure that ETFs appropriately address risks raised by counterparty exposure and collateral management. A conclusive section of the report addresses ETFs in a broader market context, underscoring the importance of intermediaries’ disclosure and conduct requirements (particularly in terms of product suitability) and referring to other work that may be relevant.

Please see the above link for more details.