IRELAND: Potential Regulatory Developments for Irish ETFs

Friday May 4 2018

It has been reported that the Central Bank of Ireland (the “Central Bank”) has announced that it will release a feedback statement later this year in response to its 2017 Discussion Paper on ETFs (the “Discussion Paper”) and the general work it has performed related to ETFs in the last year. The Central Bank has outlined it primarily intends to use the feedback it has received to assist in contributing to the International Organization of Securities Commissions (“IOSCO”) review of the 2013 IOSCO ETF Principles and in general in contributing to the international debate that is ongoing with respect to ETFs.

However, importantly the Central Bank has also indicated that there are several matters raised within the Discussion Paper where it may look to take the initiative prior to any IOSCO or other international developments in the area.

Disclosure of Portfolio Holdings

Currently, the Central Bank expects an ETF’s portfolio to be disclosed on a daily basis.

Within the Discussion Paper the Central Bank noted that it may be possible for an ETF which does not publicly disclose portfolio holdings to reach an operational solution which creates an incentive for traded prices to remain close to the ETF’s net asset value. Potential approaches cited by the Central Bank in the Discussion Paper which would allow this include (i) full portfolio disclosure to a single of limited number of Authorised Participants (“APs”) and (ii) use of an index or other proxy for the ETF’s portfolio.

The Central Bank has noted that investors cannot currently access certain strategies, which would be appropriate for ETFs, primarily because of the portfolio transparency requirements. On this basis the Central Bank is looking into a potential relaxation of the disclosure rules, possibly through an amended form of daily disclosure or some form of delayed disclosure, whilst always ensuring this does not harm investors.

ETF and Non-ETF Share Classes

The second area the Central Bank has confirmed it may look to introduce rules around relates to the possibility of establishing within a UCITS ETF both “listed” share classes (i.e. standard ETF share class listed and traded on a stock exchange) and “unlisted” share classes (i.e. non-ETF share class).

Dealing Deadlines for Hedged and Unhedged Share Classes

As standard the Central Bank requires investment funds to operate the same dealing deadline across all share classes in a UCITS (on a sub-fund by sub-fund basis). It has deviated from this requirement for UCITS ETFs in allowing different dealing deadlines for cash and in-kind subscriptions. In doing so the Central Bank has recognized that dealing with an ETF on a cash basis attracts different considerations to dealing on an in-kind basis. For cash subscriptions the UCITS ETF will need additional time to invest the cash in the market and hence the dealing deadline for cash is set earlier than for in-kind.

Within the Discussion Paper the Central Bank queried if there may be other circumstances which might necessitate consideration of different dealing deadlines within the same UCITS ETF. The example raised within the Discussion Paper related to a UCITS ETF with a hedged share class which implements currency hedging through a currency hedged index (a hedged version of the index the UCITS ETF is replicating). Within the example, the hedge trades are placed as close as possible to the time the foreign exchange rate is fixed within the index. The UCITS ETF will need sufficient time to place the trades and therefore will require an earlier dealing deadline. For unhedged classes this is not relevant and hence they could have a later dealing deadline.

Future IOSCO Work

As outlined above, the Central Bank intends to use the Discussion Paper and its work surrounding that as an educational tool in order to allow it to further participate in the international discussions taking place with respect to the ETF industry. IOSCO’s pending review of its 2013 ETF Principles will be an important part of the developments in the ETF area and the Central Bank has clearly outlined its intention to form a central part of that process. Indeed the Central Bank recently participated in an IOSCO round table event in Dublin.

Part of the IOSCO review is expected to include matters such as investor understanding of ETFs that are using more complex indices. Representatives of the Central Bank have also recently confirmed that one area it is expected IOSCO will look into is the potential introduction of a naming convention for ETFs. In the meantime the feedback statement from the Central Bank and the potential amendment to the rules outlined above is expected later this year.