Investors in Europe seeking transparent and diversified exposures to asset classes, regions, or sectors have increasingly chosen Exchange Traded Funds (ETFs) in recent years. With annual growth of 23% since 2008, the European ETF industry had assets totalling €304bn spread across 2130 listings at the end of 2013. However, the perception remains that ‘market quality’ including attributes such as transparency and connectivity between markets is not commensurate with the growth in the asset base. Investors seeking best execution require price and volume transparency and the ability to easily transact across European borders.
Europe’s major issuers, liquidity providers, trading venues and investors in ETFs strongly support the inclusion of ETFs in the scope of the updated Markets in Financial Instruments Directive and Regulation (“MiFID”) regime, due to apply from the beginning of 2017. In their letter, they outline a number of issues to be addressed by ESMA’s detailed rulemaking at ‘Level 2’ of MiFID and in respect of the Central Securities Depositary Regulation (CSDR) to catalyse the development of increasingly robust, transparent and more liquid ETF markets in Europe. In summary:
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They encourage ESMA to ensure that the forthcoming implementing and technical post-trade transparency rules are sufficiently robust and rigorously enforced.
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The emergence of competing consolidated tapes would have to be supported by harmonised post-trade data and publication standards taking into account the characteristics of the ETF market and be applicable wherever trading took place.
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Since the transparency afforded by a consolidated tape for ETFs is of key importance to end-investors, and ultimately market quality, if a comprehensive commercial solution does not come forward they would encourage ESMA to advise the Commission to mandate a single authoritative consolidated tape provider.
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In defining a liquid market for ETF’s ESMA should note that the measures relevant to define a liquid market for shares (average daily transactions, average daily turnover and free float) are not wholly appropriate for the ETF market.
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A consistent regulatory framework across Europe in matters such as buy-in regimes is of key importance to enhance the post trade environment for ETFs. ESMA should be vigilant in respect of de facto implementation of the CSDR to avoid possible regulatory arbitrage.
Media release
Full letter
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