The exchange traded fund industry’s growth may hit a snag after a European watchdog proposed new regulation on securities lending in light of the recent financial crisis.

Last week, the European Securities and Market Authority proposed that all revenue generated by securities lending will have to be returned to investors and more rigorous guidelines will be placed on collateral, reports Anjuli Davies for Reuters. [European Regulator Proposes ETF Rules]

“These guidelines are a valuable response to many of the issues identified in the ongoing debate on shadow banking and will constitute an important step in the development of the regulatory framework of UCITS,” Steven Maijoor, chair of ESMA, said in a statement.

UCITS, or undertakings for collective investments in transferable securities, ETFs are investments that were authorized in one member state of the European Union and may be traded in other member states.

The ESMA has specifically been scrutinizing regulation of physical ETFs that reflect the performance of stocks, bonds or commodities. [European Regulators Impose Strict ETF Rules]

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