"The aim of these guidelines is to enhance investor protection and limit the risk of certain practices by strengthening, in particular, the standards applicable to collateral received in the context of activities such as securities lending," Steven Maijoor, chair of the ESMA said in a statement.
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The watchdog said concerns remained about the sale of complex products to retail investors but there were no firm proposals yet on whether to divide ETF products into "complex" and "non-complex" groups or whether the sale of derivative-based synthetic ETFs to retail investors should be restricted.
In its consultation paper, ESMA said that ETFs will need labeling, and will require more transparency overall, while collateral, used by both swap-based ETFs and those physical ETFs which do securities lending, will have to meet tougher standards.
It is also proposed that the collateral posted to mitigate counterparty risk should comply with guidelines established by CESR, while recommending that diversification and haircut criteria be strengthened.
For synthetic ETFs, which use derivatives to generate index returns, ESMA will apply the same rules on collateral management as for securities lending.
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By GlobalDataThe industry now has until March 30 to respond to the guidelines before they are finalized for adoption in the second quarter of the year.
