Regulation of exchange traded funds as part of ESMA guidelines implementation: Operational costs and requirements for exchanges

Abstract

After the 2008 financial crisis, European financial regulators began to scrutinise heavily all areas of financial services. That scrutiny eventually extended to the exchanged traded fund (ETF) industry, led by The European Securities and Markets Authority (ESMA). As relatively new financial products that had seen dramatic growth over the last decade, ETFs were perhaps due some level of review. After 18 months of investigation and consultation with industry, ESMA published its consolidated Guidelines On ETFs and other Undertakings for Collective Investment in Transferable Securities (UCITS). These guidelines do not introduce any radical changes to the ETF industry, but rather focus on increasing transparency and disclosure for both ETFs and more traditional UCITS funds. The guidelines address and introduce new rules for (among other things) UCITS ETF naming conventions, efficient portfolio management techniques, securities lending, eligible financial indices, and collateral management. This paper provides a brief outline of the guidelines and looks at a few of the requirements from the perspective of an ETF provider.