ETFs seen benefiting from more standardisation
The market for exchange-traded funds is booming but a more standardised framework and sharply focused approach could help it hit greater heights and create more liquidity for institutional investors, industry experts argue.
A major challenge for dealers, including banks vying for a bigger share of ETF trading volumes, is how best to keep track of key administrative data.
That includes whether a dealer is an authorised participant to create and redeem ETF units, Deborah Fuhr, London-based founder and managing partner at research house ETFGI, told AsianInvestor.
It also includes details of the process for trading each ETF, the cut-off times for trades, how and where to send the trades, how and where to communicate creations/redemptions (some issuers and their custodians still use faxes), how to hedge their trades, details of trading costs and so on.
A key difficulty is that the amount and type of data provided is different and the formats can vary significantly, Fuhr said. In addition, changes can be made during the day that need to be constantly monitored.
Hence the data provided by ETF issuers and custodians to the trading desk should be standardised in terms of its format and delivery times, she noted.
The need for more harmonised frameworks and approaches is becoming more acute as the industry grows as institutional demand for the instruments swells.
The exchange-traded product market had assets of $5.25 trillion as at end-September, following net inflows of $52.18 billion in September alone and 56 consecutive months of net inflows globally, data provided by ETFGI shows. This is across 7,553 products, with 14,643 listings, from 386 providers on 69 exchanges in 57 countries.
Marco Montanari, Asia-Pacific head of passive management at Deutsche Asset and Wealth Management, agreed it would be better for all ETF market participants to have a more standard framework.
“It would help market-makers, investors and also the managers,” he noted. “And I feel there is a continuous effort to improve.
"But realistically speaking it will be a long process that will keep evolving,” he added, not least because the ETF market is fragmented by jurisdiction, both in terms of where ETFs are legally domiciled and where they are listed. This inevitably means different rules and requirements.
SHARPER FOCUS?
A report published by Greenwich Associates in August also came out in favour of a more coherent, focused approach to the market. It said “the many faces of ETFs have made them very difficult for banks to manage and have left many investors executing their ETF trades suboptimally”.
In its report entitled Letting ETFs stand on their own, Greenwich argued that th instruments should be treated as a distinct asset class, rather than lumped together with equity trading desks.
“They are not single stocks, so trading them via the same algorithms isn’t wise,” the research house said. “And while fixed-income ETFs trade on equity exchanges, they move like the bond market, putting equity traders out of their comfort zone.”
Stewart Aldcroft, senior adviser in Citi’s markets and securities services division, said the US bank recognised that specialists were needed for ETF market-making. Hence, its moves in recent months to build specialist ETF dealing desks across Hong Kong, London and New York.
For Montanari, specialists ETF desks should work fruitfully with other teams.
“It can be interesting to integrate such [specialist market-making] capabilities or work in a coordinated manner with other teams that also contribute to the ETFs’ market infrastructure", he said. "My perception is that this process is improving.”
Such moves towards more commitment to liquidity provision, along with greater market coherence and standardisation, will presumably come as welcome news to regulators.
The International Organization of Securities Commissions (Iosco), an international body that brings together the world's securities regulators, has already raised concerns about the potential systemic risks in the ETF market, with areas such as liquidity being highlighted.