ESMA consultation on UCITS, ETFs 'lacks clarity'
EUROPE - The European Securities and Markets Authority (ESMA) should clarify its position on tracking error for UCITS funds, as well as its definition of 'passive management', according to industry bodies.
Following the launch of a consultation paper on UCITS ETFs and other UCITS-related issues, a number of pension fund and asset management associations welcomed the guidelines set out by ESMA, but lamented a lack of clarity on several points.
ESMA's paper puts a particular emphasis on both synthetic and physical UCITS ETFs and details future requirements for UCITS ETFs, index-tracking UCITS, efficient portfolio management techniques, total return swaps and strategy indices for UCITS.
In its response, INVERCO - the Spanish association of collective investment schemes and pension funds - agreed on the need for more harmonisation across Europe.
It said the report would be an "essential tool" for building the single market in terms of operational issues, such as the use of collateral or the calculation of tracking error.
But it also called on ESMA to clarify its position respecting the disclosure of tracking error for UCIT funds.
Within it consultation paper, ESMA asks whether disclosure on tracking error should be complemented with information on the actual evolution of the fund compared with its benchmark index over a given time period.
INVERCO said the question was unclear.
"If the proposal means that information about the evolution of the fund should be provided more frequently or through additional sources, the answer is negative, considering that information on yearly and half-yearly reports is deemed to be sufficient," it said.
Meanwhile, EDHEC-Risk Institute argued that the consultation paper fell short on a definition of 'passive management' that would be framed in terms of a limit on the maximum level of tracking error acceptable.
The research institute said: "For an index-tracking vehicle to be considered a passive investment vehicle, it is also necessary that the underlying index be a financial index whose composition is dictated by a set of pre-determined rules and objective criteria allowing for strict systematic implementation.
"For an index to be considered representative of passive management, its ground rules should leave no room for implicit, let alone explicit, discretionary choices."
EDHEC said ESMA should launch a new consultation paper on indices that would "pave the way for major progress in the information of UCITS and end-investors with respect to the quality, governance, and auditability of indices".
With respect to UCIT ETFs, the Federation of Danish Investment Associations argued that the reasons for introducing an 'identifier' were also unclear.
In its report, ESMA argued that a UCIT ETF 'identifier' should be introduced, since ETFs are often confused with other types of exchange-traded products such as exchange-traded notes and exchange-traded commodities.
The Danish federation acknowledged that it was "challenging" to find a comprehensive definition on ETFs that did not also capture traditional UCITS.
However, it also argued that, with the proposed definition, there was a "genuine risk" that listed UCITs - "which in their structure are not ETFs" - would be labelled as ETFs.
"The suggested identifier is therefore too broad and will have severe implications for investors who in many circumstances will invest in a UCITS without the ETF characteristics they expect," it said.