European ETF Market Rules: Curse Or Cure?

August 21, 2014

The European exchange traded fund (ETF) industry has been swathed in regulation over the last four years. A total overhaul of the rules has seen regulators wading in from individual countries, Europe and on a global scale in a bid to prevent another fallout.

The impact has been costly and arduous for both the institutional and retail space. However, as the first wave of the G20 rules come to an end at close of 2014, there are still more rules to come.

According to data from research house ETFGI, the European exchange traded product industry is made up of 2,059 ETFs and ETPs giving way to 6,227 listings, from 50 providers on 25 exchanges.

Ropes & Gray is one of the preeminent firms in the U.S. when it comes to investment management and it also has a strong ETF presence. Most recently it has set up shop in London with the aim of growing the investment management function. Its aim is to be proactive in terms of understanding key business issues that the providers and investment managers have – and then having a more hands-on approach when it comes to that piece of advice. It believes the European ETF market is big, but still very much growing.’s European editor, Rebecca Hampson, talks to Monica Gogna, partner at law firm Ropes & Gray in London about what cost the regulation has come and what it will take to fully educate investors. Has the industry heard everything from the regulators now?

Monica Gogna: The regulators are clear that the ESMA (European Securities and Markets Authority)  guidelines should be adhered to and I have no doubt that they [the regulators] will do some sort of review to ensure compliance.

It is unclear whether it will be formal or informal but it is in the regulators interest that they will review it. It could be through the usual compliance checks they do with firms or it could be a thematic review, which is done through the local regulators. What are the hardest parts of the regulations?

MG: The volume. The sheer volume and the way the European legislation is written. We start with principals and recitals, which set the scene. Then articles are brought in with all the directives and the regulations, which give us a broad idea of what firms need to do and then finally firms wait for the technical standards and guidelines. There are so many bits to it and it takes a while to get an overview on how you should structure the rules - and importantly what the regulators want in terms of the structure. Does the amount of regulation create barriers to entry?

It is costly and it does create some barriers to entry for smaller firms, but I hope that as the regulations consolidate – we are now nearing the end of the first cycle of rules from the G20 in 2009, so once we get the end of that cycle [end of this year] - there will be some respite in terms of the sheer volume of key fundamental regulations to be implemented in the space of three to four years.

There is no doubt there will be other rules and regulations, but in the form of a tidying up exercise. Are the rules from ESMA the only challenge now?

MG: There are still repercussions going on in relation to the ESMA guidelines within the ETF industry. There are a lot of ETF providers making sure that ETFs are fit for purpose. Most people should have implemented them, given the deadline was February this year, and complied with the documentary requirements, but it is keeping these up-to-date and managing the nuances [such as tracking error and differences in fact sheets] that they are still grappling with.

The other point they are working on is ensuring that their trading systems are correct. And it is not just the ESMA guidelines. There is Mifid II and this is causing all sorts of excitement. From that perspective, firms (notably ETF firms) are particularly interested in the reporting requirements, especially the consolidated tape.

I don’t think how exactly this will be formulated has been established yet and we will have to wait for the technical standards to come out, but firms are already looking behind the scenes at ways they might address MiFID II and MiFIR as it is written. At the same time they are also continuing their dialogue with the regulators to ensure that actually they get what they want.

There are still technical standards and guidelines due to come in from ESMA in relation to the implementation of MiFID II and MiFIR. These will come in the next few months and these will be the details that some firms are looking for.


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