On Nov. 28, IRE CB issued findings of review of ETFs' trading.
IRE CB issued a Dear CEO letter containing key findings of examination of primary and secondary market trading arrangements of exchange traded funds (ETFs) in Ireland.
Letter sets out IRE CB's expectations and actions to be taken by the boards of firms.
Findings from review will inform IRE CB future policy development and enhancements to the current regulatory framework for the supervision of firms of ETFs.
Review
Ireland is a principal domicile for ETFs in the EU, these form significant portion of Irish funds sector, and represent 70% of total assets under management in EU ETF sector.
Authorized participants (APs) and market makers (MMs) perform crucial roles in ETF ecosystem, represent significant additional underpinning to market liquidity.
Review undertaken to ensure that, with regard to roles played by APs/MMs and oversight performed on those entities by firms, the arrangements in place are sufficient to protect ETF investors and promote the integrity of the ETF ecosystem.
Included a consideration of the provision of liquidity during normal and stressed market conditions and the effective functioning of arbitrage mechanisms.
IRE CB assessed the role played by APs and MMs in Irish ETF ecosystem, to gain an understanding of governance structures in place between firms and APs/CMMs.
Included examination of due diligence, ongoing monitoring and board oversight arrangements in firms, while seeking to address any identified gaps and risks.
Key Findings
At a sectoral level, Irish ETF ecosystem is functioning effectively, but shortcomings identified concerning oversight of APs and contracted market makers (CMMs).
Additionally, some risks were identified with regards to concentration in the sector.
Review found inadequate due diligence of APs/CMMs, with limited ongoing monitoring of these, lack of board oversight e.g. minimal specific AP/CMM reporting received.
While wide number of different APs accessed Irish ETFs, creation/redemption activity is concentrated among a limited number of APs, around 81% of total notional activity is concentrated amongst top 5 APs, with 2 contributing to significant percentage of total.
For CMMs, those referenced by ETFs are mostly concentrated amongst 5 CMMs, those 5 CMMs were referenced as being used by approximately 88% of ETFs in total.
This concentration may pose risks re liquidity, effective arbitrage mechanisms and access to the market if there is disruption to marketplace or in individual APs/CMMs.
Action Required
Firms must review the actions in the letter, and incorporate the necessary changes to their frameworks and practices by the end of Q2 2025, be able to demonstrate this.
All firms must, at a minimum, assess their current practices against Measure 4 of the IOSCO Good Practices on due diligence and monitoring, and close identified gaps.
Firms must conduct assessment of reporting received by firms regarding activity of APs and CMMs to ensure they remain aware of extent to which APs interact with ETF, and extent to which CMMs trading is within the defined parameters of their contracts.
Firms should review current arrangements to ensure they have a sufficient number of APs, and where relevant, CMM relationships in place, depending on nature of ETF.
Important to demonstrate that substitutability risk has been considered and appropriate mitigants put in place, and ensure arrangements with CMMs formalized.
Effectiveness
Firms must incorporate any necessary changes following the review by end Q2 2025.
Where a firm does not take into account the actions in the letter, IRE CB may, in course of future supervisory engagement, have regard to firms' action or lack of it.
