The dark clouds hanging over the money management industry from new trading and transparency rules in Europe could prove to have a silver lining for exchange-traded funds providers.
The Markets in Financial Instruments Directive II, which became effective Jan. 3, imposes reporting, transparency and best execution requirements on financial instruments. ETFs, which were not included in the original MiFID rules, are subject to this latest iteration and, as such, details on over-the-counter ETFs trades will have to be reported for the first time.
Sources expect this to be a boon for ETF players, with an expectation that institutional investor takeup of the investment vehicle — which has been somewhat muted in Europe vs. the U.S. — will potentially explode once these investors are able to see the levels of trading and liquidity related to these funds.
"We expect that indeed MiFID (II) will spur quite a lot of interest in ETFs," said Marina Cremonese, a vice president and senior analyst at Moody's Investors Service Inc. in London.
Previously, ETF trades did not have to be reported in Europe, as much of the trading was on an OTC basis, so "the whole market did not have information on the trading volumes. From the moment (we get) better transparency on trading volumes and liquidity, it will likely prompt a larger usage of ETFs by institutional investors, as market depth and liquidity (are) important in their decision-making," said Ms. Cremonese.
ETFs are not subject to trading obligations, and so business might be conducted on- or off-exchange. "However, pre- and post-trade reporting rules are attached to both types of execution, while investment firms are also subject to very comprehensive record-keeping obligations," said Adriano Pace, London-based managing director for equity derivatives at Tradeweb Markets LLC. These transparency requirements will increase "visibility into European ETF market liquidity. This certainly helps investors get a fuller picture of overall trading activity, which should in turn boost their confidence in the depth of the market."