More transparency rules likely for ETFs

Despite hype around ETFs following losses at UBS the value proposition they offer has not changed, said an ETF provider at the Journal of Indexes Europe meeting yesterday.

Panellists at the event held at the London Stock Exchange argued against some of the recent criticisms of ETFs but conceded it was likely that more rules would be introduced to increase transparency.

ETFs have yet again hit the headlines after UBS lost money after alleged unauthorised trades which may have involved ETFs. But this will not discourage use of ETFs, said Scott Ebner head of global ETF product development at State Street Global Advisors.

"The value proposition has not changed."

Before the UBS case there was a raft of regulatory examination of ETFs and following that media scrutiny. ETFs have been labelled as complex and fears have been raised about the risks they pose, largely centred on their use of derivatives. But ETFs are not the only fund to use derivatives.

"Funds have been using derivatives for as long as I can remember", said Christos Constandinides, head of ETF research Europe at Deutsche Bank.

"We are talking about funds and funds have counterparty risk at the get go. It's a fund issue not an ETF issue." ETFs have made the issue more visible, he added.

Thomas Rampulla, managing director, Vanguard Investments UK reinforced the point by explaining that the company's index trackers use derivatives for cash management and there could be problems there just as there could be with using derivatives in ETFs.

In the US there is also discussion about the use of derivatives within ETFs and although it extends to all funds regulated under the 1940 Act (including mutual funds), "we have the same situation where the derivatives issue impacts most notably on ETFs", said Kathleen Moriarty, partner at Katten Muchin Rosenman. This is because ETFs in the US have to be exempted from the Act by the SEC.

In the US (where most ETFs are physically-backed) the focus has been on leveraged and inverse funds and out of that "there has been a wave of discussion on suitability and disclosure", notes Moriarty.

New rules for distribution of investment products are being introduced in Europe. In the UK there is the Retail Distribution Review (RDR) and on a pan-European scale this is being done through the Packaged Retail Investment Products (Prips) initiative.