ETF Rules Do Not Ensure More Money for Investors

New ESMA rules do not necessarily mean ETF and fund investors will receive more money from securities lending

Alastair Kellett 27 July, 2012 | 1:42PM

The ETF industry received a shake-up on July 25th, when the European Securities and Markets Authority (ESMA) published its latest set of guidelines for the European ETF market. The new policies are meant to bring more transparency to the industry and benefit investors. While some believe the rules will result in funds paying out more money to investors, this is not necessarily the case.

According to policies set forth in the consultation paper, fund managers must now return all revenue, net of costs, generated via securities lending back to fund shareholders. Fund providers will also have to disclose, in a fund’s prospectus, any direct or indirect fees and costs from securities lending, and the identity of the parties to which such fees and expenses are paid.

(Securities lending is a relatively unknown, but important, practice in the fund industry. Securities lending refers to when an investor loans out securities they own to other investors in exchange for a fee. This fee is designed to compensate the original investor for the counterparty risk associated with the borrower potentially defaulting on the loan.)

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About Author

Alastair Kellett

Alastair Kellett  is an ETF analyst with Morningstar Europe.

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