The creation of the first ETF share classes of mutual funds domiciled in Ireland has been one of the biggest talking points in the industry so far this year.
But the issue has once again shone a light on the regulatory divergence with its ETF rival Luxembourg, causing confusion across the industry, with the Central Bank of Ireland (CBI) and Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) taking different approaches to the UCITS ETF naming rules.
Under the European Securities and Markets Authority’s (ESMA’s) UCITS ETF naming convention, asset managers are required to use ‘UCITS ETF’ in the fund name if it offers an ETF share class alongside its mutual fund share classes.
The CBI’s decision to follow the ESMA requirement has been touted as the major reason Ireland-domiciled ETF issuers have not created more ETF share classes of mutual funds, despite being permitted by the regulator since 2017, with HSBC Asset Management the first to take up the structure earlier this year.
Meanwhile, the CSSF’s interpretation of ESMA’s guidelines offers asset managers more flexibility, stating the naming convention only concerns the ‘level’ at which the ‘UCITS ETF’ identifier must be used.
A CSSF spokesperson told ETF Stream: “In this respect, the CSSF takes the view that in the case of a (sub-)fund encompassing both ETF and non-ETF share classes, the identifier should be used in the name of the share class – and not in the name of the fund or sub-fund – to clearly differentiate towards investors between ETF and non-ETF share classes.
“We expect the use of the ‘UCITS ETF’ identifier in the name of a sub-fund only if all share classes are ETF share classes, and similarly we expect the use of this identifier in the name of an umbrella fund only if all sub-funds (and share classes) are ETFs.
“We would like to highlight that the CSSF has fully transposed into national regulation the ESMA guidelines on ETFs and other UCITS issues.”
ESMA told ETF Stream it works on an ongoing basis to “promote supervisory convergence in line with our mandate”.
However, CSSF’s different approach has allowed Luxembourg to steal a march of its rival in the case of Vanguard-style ETF share class creation, with Amundi and BNP Paribas Asset Management both holding a significant amount of assets in listed share classes.
Despite this, Ireland is currently home to approximately $953bn (67%) of European ETF assets under management (AUM) versus $277bn for Luxembourg, according to data from ETFbook.
Markus Schwamborn, director at Deloitte Luxembourg, believes this could be down to the way the CSSF has interpreted a 2013 ESMA clarification on the use of UCITS ETF labels, which appears to leave more wiggle room for asset managers.
Responding to a question on when to label a sub-fund an ETF, ESMA said: “If all the sub-funds are UCITS ETFs, the labelling requirement applies to the sub-fund level and the UCITS may decide to apply it to the umbrella level as well.
“However, if not all the sub-funds are UCITS ETFs, the labelling requirement only applies to the relevant sub-funds.”
Schwamborn said this would appear to chime with the Luxembourg regulator’s interpretation, despite ESMA only mentioning the sub-fund level and not the share classes.
“This is the reference they have, but ESMA only refer to sub-funds and does not mention share classes,” he said. “Maybe it is an assumption [by ESMA] all share classes would be listed, but I understand this as more of an interpretation [by the CSSF] as ESMA did not talk about share classes.”
Sergey Dolomanov, partner at William Fry, said the naming rules should be reformed at ESMA level, but so far there has not been enough drive from the industry to do so.
“Any non-ETF issuers looking to enter the ETF space, recognising also the operational aspect of running an ETF, have preferred to keep the business separate and launched stand-alone ETF umbrellas,” he said.
“Hence, we have not heard sufficiently strong voices looking for a rule change from either cohort of fund managers.”
An ESMA spokesperson previously told ETF Stream there is currently no plan to change the rules, which were introduced in 2012. Despite this, the same rules also apply in non-EU markets and are on the agenda at IOSCO level, which could provide a catalyst in Europe.