Financial services leaders have been invited to engage with global regulators and share their risk assessments for exchange traded funds (ETFs).
Robert Taylor, Chair of the International Organization of Securities Commissions (IOSCO), told the FSC: “I don’t want to give people the impression that we’re looking to bring the product down. What we really want to do is understand the components of the product and whether or not there are risks to both financial stability and also the expectations that the investors in this product have.”
IOSCO represents securities regulators around the world, including the Australian Securities & Investments Commission. According to Taylor, IOSCO’s member bodies are monitoring ETFs to try and quantify and mitigate risks in the event of major economic volatility. He said the industry excitement around ETFs today reminded him of structured products before the global financial crisis (GFC).
Taylor emphasised that IOSCO is keen to consult with financial services leaders about how best to manage risks associated with ETFs. “From the industry standpoint, we’d like to see that the concerns we have are reflected in [institutions’] own risk logs that they keep within their firms. Are they concerned that customers’ expectations aren’t being met with the product? Are they concerned there could be a liquidity issue associated with the product? And what do they think should be done to mitigate those circumstances?”
ETFs on the rise in Australia
During her introduction at the recent ETF Forum, the FSC’s CEO Sally Loane pointed out that Australia’s ETF industry has seen significant growth over the past few years, both in the amount invested in ETFs and the number of ETFs available to investors. “As of March this year, the market cap reached $46 billion, which represents 26% growth in the past 12 months,” said Loane.
During his keynote speech at the Forum, Taylor struck a cautious note. “The product has a lot of components that securities market regulators would worry about,” he said, reflecting on the lessons learned during and after the GFC. “There’s a great amount of self-belief within the distribution chain [and] within the product development chain, that [ETFs] are good things for investors to be involved in.”
In particular, Taylor queried whether retail investors fully understand the basic arbitrage function that supports the product – and raised the question of liability and compensation for investors: “Maybe there could just be a client issue at the end of the day, where they’re not really certain what they’ve invested in and if something really goes wrong, how will the industry sort out what its obligation to the client actually is?”
In conclusion, Taylor extended an invitation to those in the ETF industry. “We want to understand how the industry looks at ETFs, how much thought they’re given and how they’re going to react when someone has to pull the emergency brake in a market environment that is actually tanking – and tanking at the level that we had in 2008, or even worse. We want to know that the firms are thinking about this and [that they] have procedures on what they will do and what their intention is and how they would service their clients if we ended up in a situation like we were in in 2008.”