Tags: ETF

Giving Thanks to Our Colleagues and ETF Rule Open Call Report

Newsletter

SEC Announces Extension of Temporary Measure to Facilitate Cross-Border Implementation of the European Union’s MiFID II’s Research Provisions

Today the staff of the U.S. Securities and Exchange Commission issued an extension of an Oct. 26, 2017 no-action letter it provided to assist market participants regarding their U.S.-regulated activities as they engage in efforts to comply with the provisions relating to research in the Markets in Financial Instruments Directive II (MiFID II) and related implementing rules and regulations. 

SEC Announces Conference on Macroeconomic and Structural Trends and Dynamics Affecting the Capital Markets

The Securities and Exchange Commission today announced that it will host a conference on Dec. 4 entitled “The State of Our Securities Markets.” The conference will bring together current and former government officials and experts from different areas of the private sector to explore and discuss the ever-changing economic, risk and market environment and what those changes mean for the structure and function of the securities markets.

Comment Letters on Odd Lots

Securities Information Processor (“SIP”) Operating Committees are considering a proposal for the SIPs to disseminate certain consolidated odd lot quotation data as ancillary information on the SIP data feeds. They are seeking feedback on the below draft proposal.

CFTC Approves Amendments Simplifying Rules for Asset Managers at November 25 Open Meeting

On a 4-1 vote, the Commission approved amendments to Rules 4.7, 4.13 and 4.14 (Codification of Relief for Family Offices and Relief Related to the JOBS Act), that will exempt certain commodity pool operators (CPOs) meeting the definition of “Family Office” from certain registration requirements.

Read November Newsletter here

Open Call Report — The ETF Rule

Open Call

STA Open Call – November 4, 2019 – Call Notes*

The ETF Rule

Eric Pollackov, Head of Global ETF Capital Markets, Invesco

Opening Remarks & Material– Jim Toes, STA

STA Comment Letter on Asymmetric Delays, “Speed Bumps” LINK

SEC Chairman Clayton Oct 17th Statement on Thinly Traded Securities LINK

The Commission’s interest for industry input in this area is not new, thus we believe this is a good indicator that the Commission is getting close on proposing something of substance.

Notes from Fixed-income ETF Panel at STA’s 86th Annual Mkt Structure Conference LINK

Executive Summary – Jim Toes

The “ETF Rule” was adopted by the SEC in Sept.‘19. Designed to improve ETF regulation, it applies to securities covered under the Investment Company Act of 1940 and aims to streamline the conditions around exemptive relief, making it easier for companies to bring their ETFs to market. The final rule is 269 pages and tonight’s call is only 25 mins.

Questions

What does the ETF Rule seek to improve?

There has been tremendous growth in the ETF industry and investors have a robust list of ETFs to choose from, so what is the problem that the ETF Rule seeks to solve? [response] It reduces costs and shortens the time period that issuers faced in getting exemptive relief required for bringing new ETFs to market. Thus, the Rule reduces a barrier to entry. It also provides relief for SEC staff who will no longer be required to review exemptive relief requests.

Impact to Fixed Income

Fixed-income ETFs are less than 5% of the FI AUM. Will the Rule going to fuel this growth, and if so, how? [response] The Rule reduces a meaningful cost tied to the creation/redemption process of FI ETFs. Previously, issuers could only accept a whole pro rata slice of the fund or a full cash equivalent. Now, issuers are permitted to use custom basket which permits them to accept a portion of a bond index. This flexibility allows issuers to negotiate terms with an authorized participant. This should help the FI ETF space to grow faster.

Creation/Redemption Units

The ETF Rules allows, but does not require ETF issuers to lower the unit sizes on creation/redemptions. How does factor in to the ETF ecosystem? [response] The creation/redemption function is an efficient means to manage risk and capital for market makers. However, the costs to issuers on the creation/redemption process is on a “per transaction” basis. Therefore, decision on lowering the unit sizes for creation/redemption need to factor in these costs.

Download PDF version here

*This brief is meant for informational purposes only and therefore should not be considered legal advice. STA’s goal is to raise awareness on industry developments and encourage dialogue.

Talking Points – March 2019

Talking Points

Discussion Document – March 2019


Who We Are
STA is comprised of 24 affiliate organizations covering the entire US and Canada. The STA national board of governors is comprised of past presidents and industry specific leaders. Our membership represents INDIVIDUALS from varying business models – buy-side, sell-side, hedge funds, exchange traders and market makers- dealing in equity and derivative trading


SEC Rule 606 – Requests for Guidance
*As with any large scale industry project, regulatory guidance prior to implementation is often needed. As the May 20th compliance date approaches the industry seeks SEC guidance on a range of areas, including but not limited to: options calculations & reporting on amended 606(a); definition of actionable IOIs under amended Rule 606; challenges for introducing BDs.


SEC Transaction Fee Pilot for NMS Securities – Spreads and Canadian Securities Administrator
*STA believes that the impact access fees have on our market structure has evolved since they were originally allowed and then capped. We therefore support a study that includes a pilot.
*STA also appreciates that the Commission, in its final decision, responded to remarks in STA’s letter which recommended reducing the number of securities in the pilot as a means to provide protections in the event that the pilot widens spreads in securities, and coordinating efforts with the Canadian Securities Administrator.


SEC no-action letter under the Investment Advisers Act of 1940 on MiFID II
*STA believes that a meaningful number of market participants anticipate the Commission granting an extension and/or expansion on the existing “no-action” relief. A decision to allow the relief to expire in July 2020 risks to be highly disruptive if firms are not provided adequate time to adjust to the regulatory regime.
*Expiration would have a particular impact on those broker-dealers who may decide to register their research departments as investment advisers to accommodate cash payments. *Additionally, we believe that the demands on SEC resources to process an initial influx of RIA registrations and to facilitate ongoing audit and supervision reporting would be meaningful.

FINRA Working Paper: High Broker-Affiliated ATS Order Routing Associated with Lower Fill Rates, Higher Costs
*STA looks forward to being a conduit for industry input until the paper takes it final form.


Exchange Traded Products (ETPs)
*In 2018 STA established an ETF Working Group partially in response to ETF participants’ willingness and desire to be part of larger and broader equity market structure conversations.
*Some initial areas of focus include: Allowing flexibility on creation/redemption unit sizes and SEC’s Transaction Fee Pilot;
*Proposed New Rule 6c-11 (ETF Rule) – Updates and Discussion
• Disclosure of Bid-Ask Spread Information
• Canadian “ETF Facts” Disclosure Requirements

Thinly Traded Securities – UTP
*It remains STA’s view that shareholders of small to mid-size securities which lack a robust secondary market benefit from the presence of market makers and block traders who can, among other things, provide enhanced liquidity to increase the depth of the market. While the factors in enhanced liquidity provision are numerous, there are certain core ones which include: quote quality; volatility; and reduction in costs.
*While STA understands and appreciates that the goal of suspending UTP is to enable “innovative market structure solutions” we still have concerns regarding a venture or thinly traded exchange regime which allows for the suspension of UTP as part of its construct.


Market Data & Market Access: Core Data – Order Protection Rule (OPR) & Best Execution
*STA looks forward to engaging the SEC as it reviews Regulation NMS. While we do not call for a wholesale revision or rollback, we believe there are certain areas which need to be revisited for their effectiveness in today’s market structure.
*STA is currently reviewing its opinion of the OPR which was last expressed in our May 2008 Special Report:
“STA is of the opinion that a marketplace without this order protection rule will be superior to enforcing the current OPR… While the OPR was well intended, its many complex exemptions complicate compliance and dilute its effectiveness… The STA believes that the elimination of the OPR contained in Regulation NMS will allow for superior executions and will positively impact displayed liquidity.”


Combatting Retail Fraud – Rule 15c2-11
*The SEC has explored eliminating the piggyback exemption and requiring broker-dealers to periodically update 15c2-11 materials (proposals in 1991, 1998 and 1999).
*Costs to broker dealers to maintain 15c2-11 materials are meaningful and the inability to recoup them (FINRA Rule 6432) disincentivizes broker-dealers from providing public pricing and liquidity services, ultimately resulting in less, not more, public information available about small cap issuers.

  • There are workable solutions to achieve the underlying purpose of the rule: to prevent and deter microcap fraud, particularly involving issuers for which public information is limited.
    • Rule 15c2-11 materials should be made public and issuers should be liable for any misrepresentations contained in these materials.
    • Trading venues that make that information publicly available, and indicate when the information is current, should be permitted to file Form 211 with FINRA.
    • For securities of issuers that have not made current information available for a defined period of time, the SEC may want to explore limiting trading to sophisticated investors with a high risk tolerance.

PDF version here