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The ETF Market is About to Explode: Is Your Firm Ready?

On September 26, The SEC voted to adopt Rule 6c-11, otherwise known as the ‘ETF Rule’. The rule, which has been in the works for the better part of a decade, aims to improve competition and innovation in the Exchange-Traded Fund (ETF) space by making it faster, easier and cheaper for new funds to come to market.

Thanks to the rule, ETFs structured as open-ended funds will no longer be required to apply for ‘exemptive relief’ from sections of the Investment Company Act of 1940, a process that is both costly and time-consuming (the SEC has calculated that on average it costs $100K to obtain exemptive relief in a process that takes between six and nine months).

Under the new rule, issuers will now be able to launch ETFs on the proviso they can provide the requisite levels of data transparency. The good news is that most issuers already provide this data, as they are required to post daily holdings to their website as well as provide historical bid/ask spread data. The approach will provide a much faster route to market and thereby enable innovation and competition in the market.

Another interesting twist to 6c-11 is that it will also allow issuers to customize creation and redemption baskets with authorized participants (APs).  “These custom baskets can and will deviate from the pro-rata slice of the fund that they represent today,” commented John Lanaro, Global Head of ETF Data at RIMES.

Lanaro continued: “Since the inception of the ETF wrapper, the Depository Trust & Clearing Corporation has served as the central warehouse for creation/redemption baskets. However, under the new rule issuers will post these custom create/redeem baskets directly on their websites. Based on our understanding, issuers will have multiple creation and redemption baskets depending on creation unit size, but we’ll see how this plays out over time. The issuers we’ve spoken to are very keen on this aspect of the ruling, and we expect an influx of custom baskets posted to issuers’ websites.  iShares has done so already last week.”

The lightening of the regulatory load and the decentralization of create/redeem baskets make it almost certain that the ETF market will see a boom, with new products and issuers coming to market in significant numbers. In this dynamic environment, buy-side firms need to ensure that they can leverage the broadest set of investment strategies while maintaining operating scale across portfolio management, risk, compliance and performance analysis functions. That means having access to the right, high-quality data at the right time.

“At RIMES, we see this rule as a positive for our ETF efforts worldwide,” said Brett Schechterman, Head of Product for North America.  “Having the ability to source, construct and quality control system-ready holdings data requires strong relationships with a rapidly increasing number of issuers. It also requires deep experience working with varied data sets and distribution channels. Few in-house data teams can afford the resources needed to manage the necessary scope of relationships and to carry out these tasks rapidly, accurately and at scale. Buy-side firms should therefore look to the RIMES ETF Data Management Service to take on the heavy-lifting so that they can maximize the investment opportunity universe while focusing on their core business.”

 

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