EDHEC-Risk Institute criticises IOSCO’s stance on ETF index principles

Jul 1st, 2013 | By | Category: ETF and Index News

EDHEC-Risk Institute has taken issue with elements of the International Organisation of Securities Commissions’ (IOSCO) recently published ‘Principles for the Regulation of Exchange-Traded Funds (ETFs)’.

EDHEC-Risk Institute criticises IOSCO’s stance on ETF index principles

EDHEC-Risk Institute has criticised IOSCO’s stance on ETF index principles.

The Paris-based financial research institute broadly welcomes the guidelines put forward by the intentional securities regulator, but “deplores the timidity of the organisation’s proposals on index transparency”.

EDHEC’s criticism appears to revolve around two of IOSCO’s nine Principles: Principle 4, which says that regulators should consider imposing requirements regarding the transparency of any index referenced and its composition; and Principle 8, which says that regulators should assess whether securities laws and rules appropriately address potential conflicts of interests raised by ETFs.

EDHEC believes that, in the face of index provider opposition and concerns about the necessities of confidentiality or intellectual property protection, IOSCO has side-stepped the issue of index transparency. IOSCO’s soft approach, it says, is likely to result in an unlevel cross-border playing field and in insufficient index-user protection and information in multiple jurisdictions.

It argues that informed use of indices requires not only clear summary information on index objectives and key construction principles, but also complete transparency on both index methodology and historical data on index values, constituents and weights. While the former allows for cursory screening of indices against a user’s objectives and constraints, the latter permits full independent index replication, which, in turn, allows index users to verify index integrity, assess the systematic character of methodologies, and evaluate the relevance and suitability of indices.

EDHEC has called on regulators and index providers to adopt standards on par with those recently defined for European Undertakings for Collective Investment in Transferable Securities (UCITS), as edicted by the European Securities and Markets Authority (ESMA). These standards champion complete transparency of index methodology and full disclosure of index values to be provided on a complimentary basis.

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