Esma unlikely to separate Ucits products

Despite regulatory focus on ETFs this year, in the open hearing held by Esma yesterday, there was agreement that changes to Ucits should not single out ETFs.

"It seemed that there is a consensus that any new regulation concerning derivatives and securities lending should be applicable to all Ucits and if there are rules regarding tracking error, they should be applicable to all indexed Ucits," says Alain Dubois, chairman of the board at Lyxor.

"I think that the purpose of the Esma ETF and structured funds consultation is to improve Ucits regulations, especially as they concern ETFs and structured funds, but not only," says Dubois.

"The way they regulate is to have as broad as possible an application."

Responses to Esma's discussion paper have now been made public. Submissions from the industry contained few surprises; while agreeing that greater transparency could be imposed on ETFs, many institutions stressed that the Ucits rules already provide a robust framework to protect investors.

The Deutsche Bӧrse Group is one such organisation: "We therefore do believe that the existing Ucits regulation already provides a sound framework for both institutional and retail investors to take self-directed, educated investment decisions in Ucits instruments," it says.

One of the questions raised by Esma was the possibility of limiting distribution of products and labelling some Ucits products as ‘complex'. This has been met with several suggestions that it would be unnecessary and/or confusing to investors.

"Retail investors should not be prevented from investing into Ucits ETFs nor structured products. Indeed, such products are usually designed to meet the retail investors risk/return need," says the European Banking Federation.

Although other respondents did argue that some Ucits structures should be treated separately.

In its response the European Systemic Risk Board (ESRB) says: "If further systemic risk analysis should conclude that additional measures are necessary and adequate, the ESRB encourages for additional standards to be developed, which might ultimately suggest that ETFs (and financial instruments with similar features) may only be sold as complex vehicles."

But the marketing and distribution of financial products is already regulated under Mifid and Dubois says it is unlikely that Esma will introduce rules on distribution outside the directive, which is currently undergoing a review.

Esma's discussion paper on policy orientations on guidelines for Ucits exchange-traded funds and structured Ucits was published in July following a raft of regulatory examination of the ETF industry.

It announced that it was developing guidelines and examining measures to "mitigate the risk that particularly complex products, which may be difficult to understand and evaluate, are made available to retail investors".

Market rumours suggest that a full consultation from Esma will be started at the end of this year or early next year.