Regulatory Differences Seen Hindering European ETFs

Regulatory fragmentation across Europe continues, with experts saying the differences are harming ETF growth.

In the latest example, the French financial regulator's intention to relax portfolio transparency rules for active ETFs diverts from the Central Bank of Ireland’s (CBI) current approach.

The disparity in regulation across Europe has been identified as stagnating the growth of the market—which has still doubled in assets under management over the last four and a half years—but remains a key barrier when compared to the U.S.’s more favorable regulatory conditions.

Regional Interpretations

The European Securities and Markets Authority (ESMA) launched an industry-wide review of the UCITS Eligible Assets Directive (EAD) in May after remaining untouched for 12 years.

The review aimed to clarify definitions and standardize the interpretations of the type of assets UCITS funds invest in including structured and leveraged loans, AT1 bonds, commodities, crypto assets and emission allowances.

Sergey Dolomanov, partner at William Fry, highlighted the importance of the review, given the value of the UCITS brand, and in light of new asset classes that are emerging such as crypto assets.

Commenting on the potential outcomes of the review, Ciara O'Leary, partner at Dechert, said it can go one of two ways.

“It will either remove the regulatory arbitrage by allowing the more ‘liberal positions’, in all jurisdictions or it will take the more traditional positions in certain jurisdictions and make that the standard,” O’Leary said.

“People within the market genuinely do not know which way it is going to go.”

Differences in the regulatory approach 

Differences in the regulatory approach to UCITS eligible assets are highlighted when comparing differing regional approaches to crypto assets.

German regulator BaFin and the Spanish regulator the Comisión Nacional del Mercado de Valores’ (CNMV) approaches to crypto assets are more aligned, both allowing investors exposure to financial instruments that have performance linked to cryptocurrencies, while the CBI takes a more cautious approach by allowing indirect exposure.

On the potential harmonization of national regulation approach to crypto assets, Coveney said it is “more likely” there will be restrictions on ETNs and the interpretation of their eligibility, rather than “opening it all across the board” where all jurisdictions will allow ETNs with direct exposure.

CBI and AMF Transparency Rule Changes

Transparency rules surrounding active ETFs have recently come into the discussion after Irish lawyers said the CBI will plan to look into ETF portfolio transparency rules as early as this year to allow non-transparent ETFs.

Recent news from the Autorité des Marchés Financiers (AMF) demonstrated that the French regulator is on a quicker timeline than the CBI, announcing that it is looking to relax transparency rules for active ETFs, stating issuers could publish holdings “at least once a month.”

Speculating if the AMF was to relax the portfolio transparency rules for active ETFs, O'Leary said, “You will not see a massive increase in active ETFs being created in France, most conversations we have with people say that they are going to Ireland, or sometimes Luxembourg.

“But whether it would be enough to move the needle fully, then all the activity economic just go to France, you just don't know at the moment.”

Dolomanov added it is important to consider if the transparency rules will need to be in line with the domestic regulator or with the rules of the jurisdiction of their trades and venues.

“It seems like overall the direction of travel quite slowly towards allowing some kind of, you know, some national disclosure.”

This article was originally published here on etf.com sister publication ETF Stream.