Citi 2018 FinReg Outlook

At Vanguard, we believe that policymaker’s focus to ensure investors get value for money and that there is effective price competition will help level the playing field, increase competition, enable greater innovation, improve choice, and therefore significantly improve the financial well-being of investors. Challenges aside, the envisaged review of UCITS [Undertakings for Collective Investment in Transferable Securities] is a fantastic opportunity for managers of funds distributed across theEU. TheEuropeanCommissioncould removemarketing rules andadministrative requirement frictions that unnecessarily limit the cross-border distribution of UCITS funds. These frictions reduce European investors’ access to the broadest range of funds and increase their investment costs. We hope that the goal of achieving a simpler, more harmonized funds market in the EU can be quickly achieved through an appropriately narrow UCITS review, without the file becoming delayed in trying to address areas that are of wider political interest. There has been a growing regulatory focus on ETFs over the last year. Do you think that will continue? As assets invested in ETFs continue to grow, I do expect that regulatorswill understandably remain focused on ETFs. While we await the 2018 preliminary output of IOSCO in this area, I think that the 2017 Central Bank of Ireland’s work on ETFs provides us with a good indication of possible areas of focus. Regulators will want to determine the consequences of increasing availability of ETFs to retail investors. In this regard, we will be keen to point out the positive impacts that ETFs bring to retail investors — broad diversification, trading flexibility, and lower costs. To the markets more generally, ETFs provide an additional source of intraday liquidity and offer valuable information about market conditions — while refuting suggestions that the increased volumes in ETFs have led to any strain in the ETF architecture. What issues are regulators looking at? Given the growth of the ETF industry, we expect that policymakers will review the appropriateness of the regulatory framework for ETFs. Although sometimes portrayed as unique instruments, ETFs are comparable to traditional mutual funds. It is important to allow them to continue to be categorized and regulated under well-established regimes, such as the UCITS Directive. Alternative approaches could risk damaging existing regulatory brands and impose unnecessary complications for investors. We expect policymakers to continue to focus on the role of Authorized Participants and liquidity providers in establishing the spreads at which ETFs trade and the connection between secondary ETF market activity and the underlying primary markets. We recognize the important role played by Authorized Participants and liquidity providers, and our experience suggests that the economic incentives available to these market participants means a robust arbitrage mechanism exists even in periods of stress. The final area of focus is likely to be the appropriateness of certain strategies for ETFs. We consider that whether a strategy is appropriate for an ETF should primarily remain a matter for asset managers to determine, based on transparency, liquidity, and capacity management considerations in respect of the mandate in question. At the same time, we do recognize that there are increasing examples of more niche products, such as leveraged and inverse and ETFs of less liquid/illiquid asset classes. These products give rise to separate and distinct challenges than those posed by more diversified ETFs. We support regulators taking account of these differences in a risk-based approach in the authorization and supervision of ETFs. What is the regulatory issue that keeps you up at night? Perhaps not things that keep me up at night, but rather there are a few regulatory issues that I deeply care about. Policymaking should always be designed to create an environment for investors that improves their chance of investment success. Investors need to receive clear, concise, and engaging materials to help them make better informed investment decisions. This should not be confused with simply providing investors with more information. It is also important that a sliding scale of advice and guidance options is available to investors. Particularly to investors who would otherwise be trapped in an “advice gap” of wanting advice but considering the available advice to be unaffordable. As asset managers continue to globalize, maintaining a global mindset when it comes to policymaking, will be critical. While respecting appropriate national divergences, it is essential that investors benefit from the economies of scale and reduced risks that can be achieved through asset managers operating on globally consistent platforms. Firms with a global footprint, like Vanguard, have a role in sharing examples of different policy approaches with national regulators and the likes of IOSCO to ensure that best practices are widely adopted and the wheel is not reinvented unnecessarily. Citi Custody & Fund Services – FinReg Outlook 2018 17 16