Last year, I said one of my hopes for 2012 was that the industry, lawmakers and regulators would continue to explore the development of a classification system for exchange traded products, or ETPs.
Well, the debate over labeling of ETPs continues to be front and center. At the IndexUniverse conference in Florida last month, attendees discussed whether more complex products should be allowed to use the ETF label, and whether or not more complex products should be restricted to only certain investors.
Just this week, Europe’s securities market regulator, ESMA, started a public comment period for Europe’s ETF market. We welcome ESMA’s proposed guidelines and support financial regulatory reform that increases transparency and protects investors.
We continue to advocate a new European classification system that would enable investors to clearly distinguish between physical versus derivative-replicating exchange traded funds (ETFs) as well as exchange traded notes (ETNs) and exchange traded commodities (ETCs), and look forward to working with the various interested parties to take this forward.
At BlackRock (BLK), we have proposed a standard classification system that would use clear labels to clarify the differences between products. Developing BlackRock’s proposed classification system came about after much thoughtful debate within our firm. ETPs are growing quickly. BlackRock is committed to supporting the growth of the ETP market and making sure investors understand these products.
Not surprisingly, since we released our proposal, there have been several attempts to pick holes in our concept. But what both supporters and detractors of our system seem to agree on is that there is the need for more — and better — disclosure to help investors understand what they are buying. If a fund calls itself an “equity” fund but actually gets the majority of its exposure through a series of undisclosed swap counter-parties, shouldn’t our industry come up with a method to ensure investors understand that dynamic before they purchase the fund?
Ensuring that investors know what it is they are buying does not end with a label. But a clear label, along with continued education and point of sales disclosure, can go a long way toward making sure investors are buying products that match both their investment objectives and tolerance for risk.
