Exchange Traded Funds investors will benefit from renewed focus on European trading infrastructure, new research finds

10 August, 2020

  • New research shows that the ETF industry would benefit from further alignment of trading rules across Europe to improve investor experience
  • Greater transparency of trade data, simplifying venue choice, greater collateral acceptability and enhancement of the post trade process will remove some of the fragmentation and unlock further potential in this market
  • The findings of this research align with the European Commission's aim with Capital Markets Union (CMU), to create deeper and more integrated capital markets across the EU

Exchange Traded Funds (ETFs) have grown significantly since their inception globally over 25 years ago, representing 7.5% of European assets under management, and are now a well-established investment vehicle. Despite a relatively fragmented European ETF market, assets under management in listed European domiciled ETFs at the end of May 2020 was US$892-billion.

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Our new report 'ETFs: Unlocking further potential' calls for further development of Europe's ETF trading infrastructure. This independent research involved a macro review of the industry, interviews with key industry players and expert analysis.

Speaking at the report launch, Marie Coady PwC Global ETF Leader and Partner at PwC Ireland commented, "For the industry to flourish in Europe, pragmatic solutions are needed bringing greater investor protection and choice. Despite the growth in ETFs over recent years, in order to truly unlock their potential, further developments in market infrastructure will enhance access and experience for investors."

"The proposed further harmonisation of rules and standards will reduce fragmentation and further strengthen an integrated capital markets across the EU."

This PwC report reveals four key areas to improve ETF trading and harness growth opportunities:

Improve transparency for greater investor confidence

There is potential for further enhancements to MiFID II to improve transparency, particularly around the availability, quality and consistency of data on ETF trading across jurisdictions. Ultimately, a consolidated tape: a single record that aggregates information about trading across all EU markets, would be highly beneficial to investors.

Align on trading venue rules

The current variety of venues where ETFs are traded, while having its benefits, can lead to inefficiencies such as higher bid or ask spreads and trading costs for investors. One vital issue is the lack of consistency of "rule book" across different venues in key areas. Addressing these inefficiencies could result in lower costs, increase investor protection and promote ease of access.

Enhance the clearing and settlement environment

While ETFs have historically been captured within the rules for single securities or UCITS vehicles, establishing arrangements for the clearing and settlement of ETFs within these regulations could drive greater opportunities and help to align the primary and secondary markets, supporting greater future trading volumes.

Greater acceptability of ETFs as a form of collateral

For ETFs to reach the next frontier, they need to be even more widely acceptable as a form of collateral for lending, recognising that they have unique features that are of value to investors and they enhance options for the broader capital markets.

Marie Coady concluded, "The European ETF market has grown strongly in recent years. Despite the impact of COVID-19 on markets, ETFs have proven themselves to be resilient and assets under management levels have shown strong recovery. Further growth is expected as ETFs emerge as a core product for many investors, and as the market matures the European market structure should mature with it."

"In particular, the evolution of ETFs into a more mainstream part of the European financial services market merits consideration in the wider context of the European ETF trading environment. The considerations outlined in this report to further drive efficiencies, transparency and consumer confidence in ETF trading could positively impact the structure of the European market and would be welcome."

Ends

Notes to editors

Interviews are available with representatives from PwC; please contact Johanna Dehaene.

About Exchange Traded Funds

Established over 25 years ago, Exchange Traded Funds (ETFs) are now a well-established investment vehicle and now represent 7.5% of European assets under management.

Despite a relatively fragmented European ETF market, assets under management in listed European domiciled ETFs at the end of May 2020 was US$892-billion.

Exchange Traded Funds are investment funds that are listed on stock exchanges and ETF shares are traded throughout the day similarly to single stocks. In Europe, they are typically regulated under UCITS regulations and may be listed across multiple exchanges.

About this report

PwC undertook this independent piece of research with a view to framing some of the practical challenges faced by ETF industry players. As part of our research, PwC interviewed key participants across the industry spanning the issuer community, market makers and Authorised Participants to understand the different perspectives and challenges from the current market infrastructure. The report aims to outline some of those challenges along with a roadmap to drive further opportunities for the ETF market.


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Contact us

Marie Coady

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6810

Johanna Dehaene

Corporate Communications, PwC Ireland (Republic of)

Tel: +353 1 792 6547

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