Proposals from the International Organisation of Securities Commissions (Iosco) have been widely criticised for distinguishing between exchange traded funds (ETFs) and collective investment funds (CIFs).
Iosco’s recently published consultation on ETFs proposed specific guidelines relating only to ETFs, instead of all CIFs.
The chairman of Lyxor Asset Management, Alain Dubois, did not understand why Iosco had adopted this approach, saying that most of the proposals would be applicable to all CIFs.
“Iosco said themselves that ETFs are CIFs, but it wants to propose guidelines only for CIFs,” said Dubois.
The difference between ETFs and undertakings for collective investment in transferable securities funds (Ucits) is that ETFs are listed on a stock exchange.
Joanna Cound, managing director, government relations at Black Rock agreed that ETFs are largely Ucits products, meaning they are subject to the strict rules of issuer diversification, counterparty exposure and collateral quality.
“I would say however that there is large range of different funds out there,” said Cound. “We would classify them as exchange traded products (ETPs) - some of which are Ucits.”
Speaking at the EC’s shadow banking conference, an opportunity for stakeholders to participate in the unfolding debate, Dubois said that it is strange that derivatives are popularly associated with ETFs.
The derivatives used by ETFs are straightforward instruments. “They are simply derivatives that transform one basket of securities into the performance of another basket of securities,” he said.
An ancillary activity
Addressing the issue of securities lending, Cound said that it is important for policy makers to understand that it is an ancillary activity.
“Some funds lend securities when it is beneficial to the end investors, others don’t,” she said.
On average, in Europe, the amount of securities that BlackRock lends out is around 15% of the fund.
The BlackRock representative added that it’s important to differentiate between swap based ETFs and securities lending. While securities lending is ancillary - the fund can run without securities lending - swaps are inherent to the swap ETF.
Guillaume Prache, vice chair of the European Commission’s financial services user group, emphasised that the main actors in shadow banking are the banks.
“For us it’s not only shadow banking, but it’s also banking shadows,” said Prache.
Prache wanted to know where the lending of all of these swaps goes. And, importantly, what the banks are using them for.
“It’s obvious from the statistics that it’s not going to the real economy,” he added.
A key point raised at the session addressing investment funds, ETFs and shadow banking issues was that it is retail investors that have the real problem with index ETFs.
In Europe 90% of the index ETF is institutional markets, with the remaining 10% is for retail investors. In the US the split is 50:50.
“Index ETFs are straightforward investment proposals for retail investors, they are very low cost for the retail investors,” said Prache.
But despite this, they are not offered to retail investors.