ASIC identifies risks in ETP market

The Australian Securities and Investments Commission (ASIC) has identified a range of risks in the exchange-traded products (ETP) market in Australia following a review prompted by the growing interest from SMSF and retail investors.

“Report 583: Review of exchange traded products” found while the market is largely performing well, there are risks that require monitoring by issuers and oversight by market operators.

This bears particular relevance for SMSFs as Australian Securities Exchange Quoted Assets ETP ownership statistics show the sector accounts for more than 60 per cent of the market.

The key concern ASIC identified is the potential for the bid/offer spread to widen temporarily, leading to investors paying a spread that would be considered too high, as such undermining the relatively low-cost proposition of some ETPs.

The corporate regulator also called for market operators and issuers to play a more proactive role in monitoring ETP performance, including market liquidity. It suggested if they notice spreads widening unreasonably, they should take appropriate action.

Another area of concern for ASIC was market-maker concentration as two entities provide most of the liquidity despite there being a growing number of new entrants to service the expanding market.

“This risk was highlighted by some of the issuers in their responses to our review, but there were varied views,” the report said.

“Issuers generally expressed high confidence in the ability of the market-making system to provide liquidity to investors and thought that the system was operating well, despite the limited number of formal market makers.

“The issuers noted that the market-making system was still evolving and they are encouraged by the arrival of potential new players which should provide additional sources of liquidity.”

The regulator also recommended ETP issuers publish the indicative net asset value often enough to allow investors and financial advisers to make more informed decisions.

ASIC commissioner John Price said: “We encourage issuers to continue to educate investors and their advisers about how the ETP market operates and to provide them the tools, like an iNAV, to help them make more informed investment decisions.”

Investment Trends data from September 2017 showed out of the 314,000 retail investors in the ETP market, 105,000 were SMSFs.

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