ASIC’s review of exchange traded products

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Earlier today ASIC released Report 583 – Review of exchange traded products (ETPs), which sets out the findings and recommendations of ASIC’s comprehensive review of ETPs in Australia.

This report will be of interest to issuers and market operators of ETPs, along with retail investors.

Overall, the report found that the market is performing well, with ETPs meeting the relatively low cost and liquidity expectations of investors.

Not surprisingly however, the report identified a range of risks and concerns including the potential for the bid/offer spread to temporarily widen, resulting in investors paying a spread that would be considered too high, and undermining the relatively low cost proposition of some ETPs.

ASIC also believes 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 a proactive response.

The accompanying recommendation that ETP issuers publish the indicative net asset value (iNAV) with a frequency that enables investors and financial advisers to make more informed decisions, aligns well with the overarching objective to ensure the market is delivering on promises to investors.

ASIC is seeking to place a renewed emphasis on educating investors and their advisers about how the ETP market operates, and according to Commissioner Price “provide them the tools, like an iNAV, to help them make informed investment decisions”.

Another ASIC concern was market concentration in terms of liquidity being provided by the two largest issuers which it considered represents a risk for the increasing amount of new entrants entering the market.

Finally, ASIC is keen to encourage issuers and market operators to effectively prepare for the worst in terms of ensuring their policies cater for the possibility of the need to remove ETP’s that are no longer suitable for quotation by way of an orderly wind down.

ASIC has advised that they will continue to engage with the ETP industry about the monitoring of spreads on a more regular basis, appropriate to the nature of the underlying assets, as well as continuing to monitor the development of the market and the experience retail investors are having when engaging with, or investing in this market.

For the complete list of recommendations and useful links to numerous secondary sources, the full 59 page report can be accessed here.