Assessing the impact of regulatory change

Sean Tuffy, Citi

Tracking the major regulatory market developments in ETFs, and what they mean for clients keeps Sean Tuffy (pictured), Director, Head of Market & Regulatory Intelligence, Securities Services, Citi, and his team busy.

Citi offers an end to end solution for ETF issuers and investors all the way from custody and fund administration to trading, across 13 domiciles globally, and a workflow platform which automates the whole ETF process, called the Advanced Citi ETF System (ACES).

Issues that are getting his attention at the moment include what ESMA might be doing in financial services in Europe, and the launch of semi-transparent ETFs in the US. 

“I analyse the impact of global market and regulatory developments that are of strategic interest to the asset management industry  and ETFs are a big part of that trend,” says Tuffy, who is taking part in the 'Regulatory impact on institutional ETF investing' panel discussion at the etfLIVE Europe online summit at 9.00BST on 21 May. “The popularity of ETFs over the last decade or so is pretty pronounced.”

Ireland enjoys its booming ETF business, partly because of the double taxation treaty with the US, but also because Europe looks like ripe new ground for expansion.

“There is growing interest from US managers in the European ETF space as it is less crowded with more room to grow.”

Most US firms want to bring a little bit of everything they have to offer to Europe, replicating the strategies they already have, Tuffy says. “You are also see seeing a trend from a lot of managers for more thematic or smart beta products, because the passive index tracking business is dominated by the big three which makes it a hard industry to get into from the US.”

The launch of the first semi-transparent ETFs in the US has been heavily covered by ETF Express.

ONLINE EVENTTuffy observes that this new development for the ETF industry has gone reasonably well, but assets remain small. “What’s interesting is that it instinctively makes sense for active managers to have a way to package their products in the ETF wrapper but now there are five models out there so it will be interesting to see which model dominates,” he says.

“It remains to be seen if there is a large appetite amongst retail investors for semi-transparent ETFs, which is going to be key to the product’s success.” He notes that the other big user of ETFs is for trading purposes, by active funds looking for liquid stocks to short, for instance.

“It will be far less likely they will use active funds as it would be harder to secure the stock. These strategies are much more at a direct investor level.”

Another challenge comes from the fact that a lot of advisers use ETFs in model portfolios as building blocks and Tuffy wonders if they will include active strategies.

He believes that the semi-transparent structure will arrive here. A few years ago, the Bank of Ireland considered them and put them on hold. “It’s open to be revisited, so it’s likely we will see them in Europe as there does tend to be lots of crossover in product ideas. It’s just a matter of how long it will take for that regulatory change to come.”

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