Global securities regulators have published a framework for further regulation of the US$1.9 trillion Exchange Traded Funds (ETFs) market, according to Reuters.
The Madrid-based umbrella group, International Organisation of Securities Commissions (IOSCO), wants national regulators to encourage more disclosure to help investors differentiate between the growing range of exchange-traded products and the specific risks of each ETF type.
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ETFs track baskets of shares, bonds or commodities and can be traded in real time via an exchange unlike other mutual funds, which can only be traded once daily.
According to ETFGI report, in 2012 ETFs attracted US$243 billion in new money compared with US$161 billion in 2011demonstrating the increasing demand for ETFs among investors looking for low-cost and liquid investments.
IOSCO has asked ETF managers to be more transparent about the counterparty risks raised by their securities lending activities.
Short-sellers make money by borrowing, and then selling, stocks they believe are poised to fall in value.
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By GlobalDataBut interpreters argue that ETF investors are not reaping the full financial rewards of securities lending and are broadly unaware that they are liable to cover any losses, if the borrower defaults and fails to return the stock as agreed.
IOSCO has encouraged improved disclosure of fees and expenses for investing in ETFs to complement enhanced transparency on securities lending.
IOSCO has also called for standardised disclosure on the manner in which the fund will track that index, both in terms of composition and performance.
