Expanding ETF Industry Faces Some Regulatory Hurdles | Page 2 of 2 | ETF Trends

The Securities and Exchange Commission has proposed limits on derivatives in fund products to protect investors against amplified losses, notably in leveraged and inverse ETFs. Proposals call for limits of aggregate derivatives exposure to 150% of the fund’s total assets or 300% if the use of derivatives serves to limit losses from market moves. However, critics warned that this one-size-fits-all approach would not efficiently curtail risk due to the varying risk levels in different asset classes.

“The idea is to protect investors, but you may do a better job by slapping on warning labels. If you don’t use derivatives, you could get to the same place with margin,” David Mazza, head of ETF and mutual fund research at State Street Global Advisors, told the Financial Times. “If you want to take on leverage, you could do so with a margin account even if a product’s leverage was capped at a certain per cent.”

Actively managed ETFs are slowly gaining traction but still remain one of the least populated areas of the ETF universe due to the transparent nature of the fund structure, which has drawn criticism from money managers. However, proponents like Peter Tchir of Brean Capital, an asset manager, argue against non-transparent structures, contending that “either they (providers) should live with the disclosure or they should not have an ETF.”

Additionally, after the so-called mini flash crash of August 24, 2015, which caused some 1,278 securities, mostly ETFs, to halt trading in response to a sharp decline, the industry has tweaked procedures around “limit up, limit down” rules requiring trades to be halted during violent moves. Exchange rules will continue to be fine tuned to adjust to the new age of ETFs, with some even calling for more alignment over rules governing suspensions in futures and cash markets.

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