Irish regulator may be open to reviewing ETF disclosure rules, says lawyer

The Central Bank of Ireland is considering reviewing its requirement for exchange traded funds to fully disclose their daily holdings, according to a lawyer, in a move seen as key to the growth of actively managed ETFs.

Stephen Carson, partner in the asset management and investment funds group at A&L Goodbody, said the CBI had “expressed a desire to engage with market participants and to review the requirement”.

Speaking on a webinar organised by HanETF, Carson said the requirement posed a challenge to active ETF managers, at a time when there was increased interest in such products.

He added that his firm had been engaging with the CBI on the issue.

“We’re hopeful that in the not-too-distant future, maybe later this year, early next year, the central bank will hopefully revise its rules in a way that might make it possible to operate active ETFs on a semi-portfolio transparency basis,” Carson said.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Hector McNeil, co-founder and co-chief executive officer of HanETF, said he had also been engaging with the CBI about the regulation over the past few years and thought it would come in the near term.

“I think there is an education process to show that transparency isn’t the family jewels and the end client won’t be disadvantaged by not having it,” he said. “In fact, it just allows more choice for investors.”

He added: “My view is that all payouts that have daily liquidity will eventually end up in the ETF wrapper.”

Michael O’Riordan, founding partner of Blackwater Search and Advisory, said the existing disclosure requirements were “rather bizarre”.

“For mutual funds, there are no such requirements, and both types of funds are Ucits,” he said.

O’Riordan added that the requirement left active fund managers concerned that, by disclosing the portfolio each day, they would in effect be revealing their “secret sauce” to the market and so run the risk of front running their positions.

“Hence, they are very reluctant to go down such a road right now. Whether there is merit in this is another question.”

O’Riordan said that for the European active ETF market to grow, the daily transparency requirement would need to be dropped.

Caroline Baron, head of ETF business development for Europe, the Middle East and Africa at Franklin Templeton, said the daily disclosure requirement was a challenge to the growth of the active ETF market.

She noted that, as well as the CBI, several European stock exchanges require full disclosure of daily portfolios for ETFs, unlike in the US.

But she said demand was growing. “What we have observed is increased interest from investors for actively managed ETFs, especially in fixed income, where some investors argue that there are merits in having active management in that area,” Baron said.

Fixed income ETFs represented 46.3 per cent of global active ETF assets, according to ETFGI.

“With more solutions coming to market and an increased understanding of how these ETFs operate, we believe we should see more traction in the adoption of active ETFs like we have seen in the US, albeit with some delay,” Baron added.

McNeil said active ETFs could become one of the largest segments of European ETFs. “This has been the case in the US market for the last few years, where active ETFs have been issued at a rate of 2:1 versus passive,” he said.

“This has been led by the [US regulator] allowing some levels of reducing transparency of the actual daily holdings, either partially or fully, and therefore allowing active managers to protect their intellectual property.”

CBI made reference to a 2018 feedback statement in which it said it would “engage in relation to portfolio disclosure at European and international regulatory forums”.

“The bank continues to keep its position under review but is not planning any immediate announcement on the matter,” it said.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.

Click here to visit the ETF Hub