Risks of using ETFs on Irish regulator’s radar

Added 16th May 2017

The risks of using ETFs and whether they are fully understood by international regulators are under the spotlight in a discussion paper released by the Central Bank of Ireland.

Risks of using ETFs on Irish regulator’s radar

The 100-page paper, published on Monday, sets out a number of key themes including investor expectations, liquidity issues and the increasing popularity of ETFs.  

The central bank also highlighted a specific regulatory issue in relation to how ETFs operate, by relying on two different regulatory regimes.

Although ETFs are constituted as investment funds, they are also exchange traded financial instruments, making them akin to equities or bonds and therefore subject to stock exchange rules and other regulations such as MiFID II.

“This dual nature means that ETFs are subject to the overlapping framework of both the Ucits directive and MiFID, both of which are designed to address specific issues and risks. A key question in regulatory policy is whether these overlapping regulatory frameworks allow the specific features of ETFs to be appropriately regulated”, the central bank said.

As part of its ETF work, the central bank said it already had discussions with international regulatory colleagues, industry representative bodies, funds service providers and a number of investment managers who are involved in the ETF industry.

In October 2016, it also conducted a survey covering all providers of Irish authorised ETFs to obtain information and views in relation to the ETFs managed by them.

The main concern of the new paper was to “raise questions around the existence of risks in this primary dealing mechanism and whether, if there are such risks, they are well understood by regulators”.

Irish Funds chief executive Pat Lardner welcomed the paper: “Ireland is the leading European domicile for ETFs, with a market share of almost 60% and last year Irish domiciled ETFs accounted for nearly all the net sales into ETFs across Europe. 

“It is wholly appropriate that the Central Bank of Ireland is leading the discussion and seeking wide input on this important and growing sector of the industry.”

The deadline for responses to the paper is 11 August.

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