Investors Win with New ETF Guidelines

There are three new investor-friendly rules in ESMA’s latest consultation paper

Ben Johnson 25 July, 2012 | 6:54PM
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On July 25, The European Securities and Markets Authority (ESMA) released its latest report and consultation paper outlining new guidelines for exchange-traded funds (ETFs). Here, we highlight what we believe to be three key “wins” for investors contained within the new guidelines.

1. Sharing of revenue generated via securities lending
The ESMA will now require fund managers to return all revenue, net of costs, generated via securities lending back to fund shareholders. This is a big win for investors.

Securities lending is a relatively unknown, but important, practice in the ETF industry. Securities lending refers to when an asset owner (or in this case, ETF manager) loans shares to other investors, usually hedge funds, who want to sell the assets short. Within a securities lending programme, the asset owner is exposed to some counterparty risk, but receives revenue for assuming that risk.

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Ben Johnson

Ben Johnson  is director of passive funds research at Morningstar.