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Thursday 2 August 2018

18-226MR ASIC’s review of exchange traded products identifies areas for improvement

ASIC has completed a review of the exchange traded products (ETP) market in Australia, including exchange traded funds, aimed at ensuring the market is delivering on promises to investors.

The review found that the market is generally performing well, and ETPs are meeting the relatively low cost and liquidity expectations of investors.  However, the review identified a range of risks that require monitoring by issuers and oversight by market operators.

The large and growing investment in ETPs in Australia by retail and SMSF investors prompted ASIC to look at a number of the key premises and functions of the ETP market. The key concern identified was the potential for the bid/offer spread to temporarily widen, leading to investors paying a spread that would be considered too high, and undermining the relatively low cost proposition of some ETPs.

Further, ASIC considers that market operators and issuers should play a more proactive role in monitoring the performance of ETPs, including liquidity in the market, and where they observe spreads widening unreasonably, they should take appropriate action.

ASIC is also recommending that ETP issuers publish the indicative net asset value (iNAV) with a frequency that enables investors and financial advisers to make more informed decisions.

ASIC Commissioner John Price said, 'We encourage issuers to continue to educate investors and their advisers about how the ETP market operates and to provide them the tools, like an iNAV, to help them make informed investment decisions'.

Another area of concern identified in the report was market maker concentration, as although there are an increasing number of new entrants in Australia that serve a growing market, most liquidity is still provided by only two entities. ASIC expects issuers and market operators to be aware of this risk and incorporate a means of managing it into their risk management framework.

While not many ETPs have closed in Australia to date, ASIC encourages issuers and market operators to develop policies for reviewing, and where necessary remove from quotation with an orderly wind down, ETPs that may not meet ongoing suitability for quotation, such as very small ETPs that may be uneconomical to operate.

Read Report 583, Review of exchange traded products and retail investors for a complete list of recommendations.

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Last updated: 02/08/2018 12:23