European ETFs are regaining momentum though more investor focus on administration is likely, says Liam Butler, of Northern Trust.
Europe’s exchange traded funds (ETFs) industry has emerged from a period of regulatory scrutiny in a strong position – ready to capitalise on new growth opportunities, says Liam Butler, head of ETF fund administration Europe at Northern Trust.
Characterised by meteoric growth and rapid product development in recent years, ETFs hit a flash-point 12 months ago when regulatory focus enveloped the industry. This created a sense of concern among participants who have seen European assets grow to around $350 billion* in virtually a decade since the first ETF listed this side of the Atlantic in 2000.
But the regulatory attention has had a positive side: “It’s served to clarify the products in many people’s minds and led to a more harmonised and constructive industry approach to addressing issues that arise,” says Butler.
It was the European Securities and Markets Authority (Esma) that led the regulatory scrutiny of ETFs with a review that covered all index-tracking funds within the Ucits framework. Esma’s guidelines were published in July 2012, and are likely to be implemented in early 2013.
“The industry is generally in a good position to deal with the practical challenges of implementing the Esma guidelines,” Butler says.
“For example, it is already largely geared up to disclose the information the authorities will now require.”
But, this is not to say there are no challenges for ETF providers.
The Esma requirements include that Ucits funds investing in financial indices give full calculation methodology to investors. Butler says calculation methods, just like index composition, are seen by index providers as proprietary and this means there will be some challenges around transparency. But a lot of the disclosures around risk, tracking error and general fund activity are being met.
Esma’s guidelines around direct redemption of ETF shares represent a more practical challenge. The issue here is that secondary market investors do not have the facility to redeem shares directly from the fund and instead they have to go to the exchange. At present, only “authorised participants” – the creators of the ETF shares – can redeem directly.
“Esma says it is going to be necessary for secondary market investors to have a direct redemption facility,” says Butler. “If the traded value of the ETF is less than its net asset value (nav), Esma wants secondary market investors to be able to get out of the fund at the nav level.”
While this provision could be useful to increase ETF liquidity, such as in times of market stress, Butler warns it could affect an ETF’s low cost – a large part of a product’s attractiveness.
As one of Europe’s pioneering ETF administrators involved in the first major ETFs launched in 2000, Northern Trust has experienced the evolution of the European ETF asset servicing industry first-hand.
“Investors are now looking to reinvest in ETFs but they are also paying more attention to the operational infrastructure that supports their ETF strategies”, says Butler.
“It’s important to have a holistic approach to servicing ETF industry participants including ETF investment managers, authorised participants and investors together with a sophisticated settlement process for ETF trades.”
*As reported in Blackrock ETP Landscape Report, October 2012
Liam Butler is head of ETF fund administration Europe at Northern Trust.
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