The new innovation was first looked at by the Central Bank of Ireland (CBI) as part of its discussion paper on ETFs in 2017 however the regulator decided to make no change to the daily disclosure requirements in what was viewed by the market as a “wait and see” move.
Since then, the CBI has been working with the International Organisation of Securities Commissions (IOSCO), the global watchdog, and the Financial Conduct Authority (FCA) on the transparency of ETF holdings.
However, the discussion has taken a back seat this side of the pond, according to one industry source, as European regulators have turned their focus to other areas of the ecosystem such as the incoming Central Securities Depositary Regulation (CSDR) regime and the role of authorised participants (APs) in the ETF market.
Non-transparent ETFs are expected to drive a new wave of asset managers to the ETF party as active managers will no longer have to reveal their ‘secret sauce’, a factor that has been holding back the growth of active ETFs, especially in the equity space.
How they behave in the US will be a big factor in European regulators’ decision. While they have only recently started trading stateside there have been problems in Australia.
Earlier this month, the Australian Securities and Investments Commission (ASIC), the country’s regulator, issued another warning about some issuers failing to disclose the holdings in their ETFs to market makers frequently enough.
Portfolios have only been published once a quarter, in some cases, causing spreads to widen due to market makers being unable to accurately price the ETFs.
Although this problem should be easily ironed out with ETF issuers entering into an agreement with market makers to disclose their holdings daily, it does give European regulators food for thought.
Last year, Ciaran Fitzpatrick, head of ETF servicing, Europe, at State Street, told ETF Stream regulators in Europe were two years away from making a decision on non-transparent ETFs. Considering the European ETF industry is five years behind the US in terms of maturity, even this prediction could be too soon.
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