Regulator hits ‘pause’ button

In late July, the regulator ASIC halted new ASX listings of active ETFs that do not disclose their portfolio holdings daily and have internal market makers.

ASIC is undertaking a review of these products because it’s concerned “the profit generated from internal market making is not well understood by investors”. It may also lead to conflicts and unequal treatment among different groups of investors if, for example, “an unfavourably low bid price was set for selling members”.

The role of the market maker is to facilitate an orderly and liquid market in each fund and to satisfy supply and demand for units on the ASX.

Passive ETFs use external market makers, which can oversee underlying holdings of the ETF portfolio and disclose these to the market.

Internal market making occurs because active ETF managers don’t want to continuously disclose their portfolios – it’s considered their intellectual property.

An ASIC spokesman says the review into active ETFs is expected to be concluded by the end of the year.

“We remain committed to building on our active ETF platform with additional products as we strongly believe that this is in the best interests of our clients,” says Fidelity’s Alva Devoy.

“We will continue to work with both the regulator and the industry to understand and address any concerns as we have a shared objective to make sure that the market for financial products and services is operating in the best way possible.”