The Central Bank of Ireland (CBI) has revealed a number of regulatory changes for ETFs listed in Ireland, while highlighting concerns around the 'key role' of authorised participants in the secondary market.
In its feedback statement from "Discussion Paper 6 - Exchange Traded Funds", the CBI said it would permit different dealing times for hedged and unhedged share classes within the same ETF and would also allow investment funds to establish both listed and unlisted share classes within a single fund structure.
However, the Irish regulator revealed there was no change to the requirement to have daily portfolio disclosure despite calls from the majority of respondents to have less transparency, in particular with regards to active ETFs.
The CBI said respondents were in favour of a more "nuanced" approach to portfolio disclosure, with ETF managers providing the full portfolio to just a limited number of authorised participants (APs) or giving proxy portfolio information in order to enable APs to continue to provide tight spreads but not the full portfolio.
However, the CBI said full daily portfolio transparency provided "clarity" to market participants through the information provided and enabled investors to look at the ETF structure and assess the quality of the underlying investments.
"The CBI acknowledges that a move away from the current policy could result in additional investor choice in terms of access to active ETFs but it is not evident that this reason alone is justification for lessening the current standard of full portfolio disclosure," the report said.
"[Therefore], the CBI will not change the current requirement for full daily portfolio disclosure to the public. However, the Central Bank will continue to consider this matter and will engage in relation to portfolio disclosure at European and international regulatory forums."
The CBI also highlighted concerns around the "key" role of APs and official liquidity providers (OLPs) in the secondary market.
The regulator highlighted the greater concentration of APs compared to ETF providers, especially in more idiosyncratic areas of the market such as emerging market bonds.
It cautioned a stress event materially affecting a small number of APs would "likely" adversely affect a large number of ETFs, which "could have significant consequences" in an environment characterised by cross-border distribution.
The Irish regulator said: "The CBI notes that a stress event occurring at the level of an AP could result in a liquidity event for a number of ETFs.
"While the overwhelming response to DP6 was that there will always be another AP ready and willing to fill the shoes of one which is unable to act, reliance on market willingness in a structure which is so reliant on the AP functioning is an unenviable position for regulators to be in.
"More concrete information on the extent of concentration in a market or market segment is desirable. It would permit regulators to be in a better position to assess the capacity, concentration and size, and thereby risk posed by European APs."
Click here to read the discussion paper in full.
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