The Financial Conduct Authority (FCA) is proposing to introduce a deferral regime for ETF trades priced at net asset value (NAV), in a move to reduce reporting requirements.
The deferral regime will require firms to only report ETF trades priced at NAV when the NAV is published at the end of each trading day.
Under the current regime, which is implemented across the UK and European Union, firms are required to report ETF NAV trades three times instead of once, unless a deferral applies.
This includes when an ETF NAV trade is initially agreed, which includes a flag to show the price is pending, and subsequently when the NAV is published.
Deferrals for ETFs are set at 60 minutes for trades above €10m and until the end of the day for trades above €50m.
According to the UK regulator, the introduction of the new regime will result in 0.7% fewer trades and 2.7% less volume being reported in real-time.
However, it argued that the real-time publication of ETF NAV trades, which contributes to price formation, does not justify the “operational cost” facing firms.
“Without price information, real-time publication of solely the volume of a transaction is less likely to contribute to price formation to justify the cost of multiple reports,” the FCA added.
The UK regulator is looking to align with the US which does not require ETF trades to be reported until the NAV is set.
The changes are set to be implemented on 29 April 2024.
“The premature disclosure of transactions priced at NAV may complicate the hedging and trading for certain types of ETFs for firms active in these instruments.
“We are proposing to introduce a deferral for transactions in ETFs priced at NAV because the current regime imposes unnecessary operational costs on firms that are required to make public these transactions,” the FCA said. “These firms have to deal with the publication of multiple reports for a single transaction.”
The move would lead to divergence between the UK and EU, which currently has no plans to make changes to ETF NAV trade reporting.
Jane Street warned this means ETF NAV trading on a UK venue or systematic internaliser would be reported differently to equivalent trading on an EU venue, even for the same underlying ETF.