Leveling the ETF Playing Field

Operational Challenges Ahead While some existing ETF managers may chafe at losing their exemptions and the increased reporting, the final rules have generally been welcomed by the industry. It had long been argued that the application process needed to be improved and the playing field leveled. “Although welcome, the new rules will bring operational challenges for asset managers,” warns Peggy Vena, Director of ETF Product Development at Citi. “The new requirements will be especially challenging for existing ETFs that will need to retrofit the new workflows into their processes. Changes to the N-CEN and N-PORT reporting requirements will add to the firm’s regulatory reporting burden.” The basket disclosure requirements will necessitate the development of new workflows. Unlike portfolio disclosures, which are normally straightforward data feeds from the service providers, the baskets require the intervention of the manager. When creating the baskets, the manager makes decisions about what is included in the basket and then sends that data to the Authorized Participants before the market opens. Ensuring that this information is also publicly available will add to the workload and require increased oversight of data dissemination. Firms already using custom baskets will need to go through the process of formally documenting their custom basket procedures. Beyond the administrative cost of creating these procedures, the ongoing monitoring to ensure compliance will add to the oversight workload of the manager. Firms that currently use custom baskets are accustomed to broad discretion with their use and may find the new rules far more restrictive. More to Come? This is not the end of the SEC’s work on ETFs, as there are a number of related issues on its agenda. This includes reviewing a number of proposals for semi-transparent and Bitcoin ETFs, as well as considering whether to allow existing mutual funds to convert to ETFs. Beyond the US, the International Organization of Securities Commissions (IOSCO) has been reviewing the global ETF marketplace for the last few years and is expected to release a consultation on potential market risks posed by ETFs and how to strengthen their general oversight. IOSCO cannot create rules itself; however, national regulators often use IOSCO’s recommendations when formulating new regulation. Given all these open issues, ETFs seem likely to remain in the regulatory picture for the foreseeable future. “The new requirements will be especially challenging for existing ETFs that will need to retrofit the new workflows into their processes. Changes to the N-CEN and N-PORT reporting requirements will add to the firm’s regulatory reporting burden.” Peggy Vena Director of ETF Product Development, Citi