PwC Ireland’s ETF report calls for the unlocking of further potential for ETFs across Europe
PwC Ireland’s report published in August, entitled ‘ETFs: Unlocking further potential’, made quite the splash with its call to arms on four key areas that could improve European ETF trading and harness growth opportunities, with further development of Europe’s ETF trading infrastructure.
Marie Coady, PwC Global ETF Leader and Partner at PwC Ireland, and also Chair of the Irish Funds Association ETF Group, explains that her four years of chairing the country’s funds’ association ETF Group has given her a good view on ETF matters. PwC Ireland also works with eight of the top 10 ETF providers in Europe and Ireland is the leading domicile for ETFs in Europe, with some 62 per cent of European ETF assets.
Coady’s role is now global within PwC and because of the continued growth in the ETF sector around the world, and also because of Ireland’s growing share of that business, it was a ‘no brainer, from a business perspective, to invest in detailed research in this space’.
The report draws on the experience of everyone within the European ETF ecosystem from ETF producers and distributors to the market makers and to the capital market teams within the issuers, a part of the industry that is mostly quite London-centric.
The first findings were that while growth rates in ETFs ex-US have been high, relative to the size of the business in the US, ETFs in Europe haven’t yet made significant inroads with investors in Europe. “We were collectively open to finding out what is hindering the next step in growth,” Coady says and against that back drop the findings were that a lot of that is down to the current market infrastructure in Europe.
“Ireland’s dominant position in the ETF industry meant that we were well positioned to lead on it but it was a very collaborative and rigorous research process, with all stakeholders very engaged and everyone wanting to have a say through lots of interviews.”
There was a strong feeling that while ETFs continue to be better understood, there are still challenges regarding ensuring that new Regulations emanating from ESMA or the European Commission get the nuance of ETFs. Coady cites The Central Securities Depositories Regulation (CSDR), now deferred for a year, which has rules that apply to ETFs like any other securities but have been particular challenging for the ETF industry when trying to operationalise, particularly the interplay between the primary and secondary market for ETFs.
“When the nuances of ETFs are not carefully considered and understood, there is a potential for a gap between what is written in Regulation and how the market infrastructure works in practice,” Coady says. “This was the genesis to some of the themes in the paper.”
The key issue across Europe for the growth of ETFs is the fragmentation of the markets. “There is a huge amount of fragmentation still, so the harmonisation of the rules and standards to reduce fragmentation will certainly enhance the investor experience,” Coady says.
The PwC report reveals four key areas to improve ETF trading and harness growth opportunities:
- Improve transparency for greater investor confidence. There is potential for further enhancements to MiFID II to improve transparency, particularly around the availability, quality and consistency of data on ETF trading across jurisdictions. Ultimately, a consolidated tape – a single record that aggregates information about trading across all EU markets, would be highly beneficial to investors.
- Align on trading venue rules. The current variety of venues where ETFs are traded, while having its benefits, can lead to inefficiencies such as higher bid/ask spreads and trading costs for investors. One vital issue is the lack of consistency of “rule book” across different venues in key areas. Addressing these inefficiencies could result in lower costs, increase investor protection and promote ease of access.
- Enhance the clearing and settlement environment. While ETFs have historically been captured within the rules for single securities or UCITS vehicles, establishing arrangements for the clearing and settlement of ETFs within these regulations could drive greater opportunities and help to align the primary and secondary markets, supporting greater future trading volumes.
- Greater acceptability of ETFs as a form of collateral. For ETFs to reach the next frontier, they need to be even more widely acceptable as a form of collateral for lending, recognising that they have unique features that are of value to investors and they enhance options for the broader capital markets.
The ETF ability to withstand and in fact be a supplier of liquidity in volatile markets was proven earlier this year. “The sentiment of risk as systemic has hopefully stopped now,” Coady says. “ETFs have proved their resilience, particularly the whole ecosystem around ETFs and their liquidity which is going to be even more important into the future for investors.”
She also feels that the pandemic has brought ESG into focus even more and that ETFs will play a huge role in the ESG space with full transparency that allows investors to see their entire portfolio of investments. She also believes that the whole working from home scenario will work well for ETF investing as ETFs are well position to facilitate on-line distribution.
Coady remains positive for the future growth of the ETF industry in Europe. “If we can achieve some of the things that we have proposed in the paper on harmonisation, we will do very well in Europe.”