BlackRock (NYSE: BLK), the largest exchange traded fund provider, on Wednesday called for uniform regulation of ETFs as well as enhanced disclosure and transparency.
The investment manager, which oversees the iShares ETFs, said securities regulations may need to further adapt to rapid changes in the marketplace.
“At the same time, some financial institutions have launched a variety of new products that trade on exchanges which are also referred to as ‘ETFs.’ However, some of these new products may provide less transparency than traditional ETFs that hold physical securities and may inadvertently introduce additional risk for the investor arising from the management, construction and performance characteristics of these products,” according to a BlackRock paper sent to reporters on Wednesday.
“With the proliferation of these new products, critics have questioned whether existing regulations ensure that investors fully understand what they are buying and fully appreciate the risks and costs,” the ETF provider said. “The industry has much work to do to address such criticisms, including the development of new regulations regarding transparency.”
In Europe, regulators are examining complex “synthetic” ETFs that hold derivatives to determine if the products are fully understood by investors. [European ETFs Face Scrutiny]
ETFs have also been in the spotlight amid claims they boost market volatility, while recent rogue trading scandals have involved ETF trading desks. [ETFs Under Fire]
The industry has defended itself by saying the improper trades were due to compliance failures, not a problem specific to ETFs. [ETFs and Rogue Traders]
BlackRock recommended five specific reforms for ETFs:
- Clear labeling of product structure and investment objectives
- Frequent and timely disclosure for all holdings and financial exposures
- Clear standards for diversifying counterparties and quality of collateral
- Disclosure of all fees and costs paid, including those to counterparties
- Universal trade reporting for all equity trades, including ETFs
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