The revised Mifid rules are likely to separate swap-based and physically-based ETFs as part of a division of Ucits.
The European Commission's proposals for Mifid II (as it is widely referred), released on 20 October, state: "Investment firms are allowed to provide investment services that only consist of execution and/or the reception and transmission of client orders, without the need to obtain information regarding the knowledge and experience of the client."
This will exclude "financial instruments, including collective investment in transferable securities (Ucits), which embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved".
It is unclear, however, whether this will definitely include swap-based ETFs, as Bert Verdoodt, senior associate at Clifford Chance explains: "What the proposal does is to say that execution-only services are only possible in respect of Ucits funds to the extent that they are not structured Ucits... Swap-based ETFs will probably be covered as complex Ucits but physical ETFs probably would not be."
The proposals also include increased trading transparency measures, as was widely expected. "The idea of the Mifid II proposal is to expand the scope of transparency obligations from pure equities to other equity like instruments," says Verdoodt. This includes ETFs.
This is a change the ETF market had hoped for as the fact that a large number of ETF trades are currently unreported OTC transactions means that there is a seeming lack of liquidity in the market.
If the reporting requirements for equity transactions are expanded to ETFs, it should help combat that problem.
The proposals will now be discussed by the European Parliament, which will need to approve them before they are adopted.
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