Exchange Traded Funds : an area for growth for the Maltese Funds Industry?

Abstract

The European market for Exchange-Traded Funds has grown exponentially in the last few years. The object of this work is to analyse the impact of this growth on investors and the market ingeneral, the protection of their interests, as well as its effect on the Maltese financial services industry. Although the ESMA Guidelines on UCITS ETFs have tried to develop a uniform and detailed definition of UCITS ETFs, the regulation of ETFs must not be limited to UCITS. It is important to distinguish between actively and passively-managed ETFs, and subsequently, physical and synthetic replication. The legal requirements to establish both UCITS and non-UCITS ETFs must be analysed, while bearing in mind the impact of MiFID II, MiFIR and PRIIPs. The Maltese scenario is not only regulated through the Investment Services Act and its subsidiary legislation, but also through the MFSA’s rules on Collective Investment Schemes. Based on this legal framework, one can then assess whether retail investors in particular are being adequately protected against the risks arising from ETFs. Despite the popularity of UCITS ETFs, it remains to be verified whether this type of investment product, particularly synthetic ETFs, are suitable for retail investors. As a country with an active and thriving financial services sector, Malta should also consider giving special attention to this area. In order to do so however it must be ensured that the Malta Stock Exchange as a potential platform for ETF trading has the necessary technical and regulatory framework in place to sustain such trading activity. As the European ETF market is expected to continue growing rapidly, it is essential that the current reality and risks are analysed in depth to ensure that the necessary safeguards and investor protection measures are in place.