European regulator may remove ETFs from Ucits

The European Systemic Risk Board, chaired by Jean-Claude Trichet, has suggested the possible withdrawal of the Ucits label from complex and opaque ETFs, to ensure Ucits products remain simple.

The ESRB’s suggestion comes in response to the European Securities and Market Association’s discussion paper on policy guidelines for Ucits ETFs and structured Ucits.

In its note, the ESRB considers it appropriate that ESMA acts in a pre-emptive way to ensure lessons from the recent crisis are applied to ETFs and welcomes a move to greater disclosure requirements.

However, the ESRB warns that extensive policies of disclosure in the past failed to address the risks that built up and materialised in collateralised debt obligations and other structured products.

The industry body said: ‘Note that even where more sophisticated institutional investors held such products, risks were poorly understood.’

As a result, the ESRB is recommending that ESMA exposure additional measures for ETFs, including the possibility of the withdrawal of the Ucits label.

The ESRB did, however, add the caveat that the implications of a withdrawal includes whether there would be a sufficient range of remaining instruments to meet Ucits requirements.

The body suggested the need for formal co-operation between securities markets and banking sector regulators to collect appropriate data, while understanding and monitoring risks facing banks engaged in the ETF market.

It said: ‘Specifically, the ESRB stress out the need of increasing further cooperation focused on funding liquidity risk and securities lending practices among the European Banking Authority and the European Securities Market Authority. This should contribute to better understanding of the system-wide impact of possible shocks that might propagate across banks and markets.’

On the issue of securities lending, the ESRB is proposing the need to apply CESR’s Guidelines of Risk Measurement to collateral received as part of securities lending.