IOSCO Identifies "Good Practices" for Regulators to Implement ETF Principles

In a new Report, IOSCO offered measures for regulators and trading venues on how a jurisdiction could implement IOSCOS's principles on exchange traded funds ("ETFs").

IOSCO affirmed that the principles covered in IOSCO's 2013 report: "Principles for the Regulation of Exchange Traded Funds" ("ETF Principles,") remain "relevant and appropriate" today. The original report addressed issues such as disclosure, portfolio transparency, costs and risks. In the new report, IOSCO said that no major regulatory issues have been identified since and found since the original report and that "[t]he ETF structure has generally remained resilient during historical stress events." IOSCO stated that ETFs are not likely to significantly contribute to a liquidity shock or crisis. In some cases, IOSCO said, ETF structures can offer an additional layer of liquidity.

IOSCO found variances across jurisdictions in the way ETFs operate and are regulated concluding that jurisdictions may benefit from a set of "good practices" to help implement ETF Principles. IOSCO offered the following:

• ETF Structure. IOSCO said that regulators and entities should consider measures regarding (i) the asset classes and effectiveness of the arbitrage mechanism for such asset classes, (ii) transparency requirements of an ETF portfolio, and (iii) ways to enhance the accuracy and usefulness of iNAV mandates. IOSCO also recommended that entities conduct due diligence when onboarding market makers and authorized participants to an ETF, and continue to monitor them regarding the functioning of the arbitrage mechanism and liquidity provision. IOSCO recommended regulators evaluate current securities laws for their effectiveness in addressing potential conflicts of interest raised by ETFs.
• Disclosure. IOSCO encouraged regulators to consider disclosure requirements regarding (i) ETFs that invest in novel asset classes, (ii) fees and expenses associated with investing in ETFs and (iii) information that would help investors to differentiate ETFs from other exchange traded products.
• Liquidity. IOSCO advised regulators and trading venues to (i) monitor secondary market trading and other market-making activities of ETFs and (ii) implement rules if necessary governing the "orderly trading of ETF shares."
• Volatility Control Mechanisms. IOSCO said that regulators and trading venues should "appropriately calibrate" volatility control mechanisms applicable to ETFs in light of their liquidity and volatility profiles.