SC may re­duce ETF is­suance costs

> Also con­sid­er­ing widen­ing the range of as­set classes, en­hanc­ing the mar­ket-mak­ing frame­work in on­go­ing re­view of guide­lines

The Sun (Malaysia) - - MEDIA & MARKETING - BY EVA YEONG

PETALING JAYA: The Se­cu­ri­ties Com­mis­sion Malaysia (SC) is con­sid­er­ing sev­eral ini­tia­tives, in­clud­ing re­duc­tion in is­suance costs, in the on­go­ing re­view of its Ex­change-Traded Funds (ETF) Guide­lines .

Ac­cord­ing to the SC, a high-level task force has been formed to iden­tify and de­lib­er­ate op­por­tu­ni­ties and chal­lenges as well as pro­pose rec­om­men­da­tions for fur­ther growth in the ETF mar­ket.

“In this re­spect, sev­eral ini­tia­tives are cur­rently be­ing con­sid­ered. Th­ese in­clude a re­view of the reg­u­la­tory frame­work, widen­ing the range of as­set classes, fa­cil­i­tat­ing the ap­pli­ca­tion of new strate­gies, en­hanc­ing the mar­ket­mak­ing frame­work and re­duc­ing is­suance costs,” it said in an email re­sponse to Sun­Biz.

The task force is chaired by the SC and com­prises rep­re­sen­ta­tives from the in­dus­try, Bursa Malaysia Bhd and in­sti­tu­tional in­vestors.

In ad­di­tion, the SC is look­ing to en­hance col­lab­o­ra­tive pro­mo­tional and ed­u­ca­tional ef­forts with the in­dus­try, to in­crease the vi­brancy of the ETF mar­ket.

“Th­ese ef­forts will un­lock more op­por­tu­ni­ties for is­suers, ex­pand in­vestor base and strengthen over­all growth of the fund man­age­ment in­dus­try,” it said.

Bursa Malaysia said the cost of is­suance, lim­ited num­ber of bro­kers and lack of a ded­i­cated dis­tri­bu­tion net­work are some of the chal­lenges faced by ETF is­suers.

“ETFs are is­sued by fund man­age­ment com­pa­nies. In this re­gard, the cost of is­suance of ETFs is high com­pared to is­su­ing con­ven­tional unit trusts. This is be­cause ETF is­suance is viewed as an ini­tial pub­lic of­fer­ing, hence the var­i­ous le­gal and reg­u­la­tory costs im­posed are higher. Th­ese high costs act as a de­ter­rence to is­suances,” the reg­u­la­tor told Sun­Biz.

Bursa Malaysia said a mar­ket maker is ap­pointed to pro­vide liq­uid­ity to the ETFs to fa­cil­i­tate se­condary trad­ing as ETFs are listed but the num­ber of bro­kers who are will­ing to carry out mar­ket mak­ing ac­tiv­i­ties is lim­ited.

“The Malaysian ETF mar­ket is still nascent and de­mand is still at low lev­els, thus not many bro­kers are will­ing to pro­vide mar­ket mak­ing ser­vices to ETFs as they view this ser­vice to be un­prof­itable,” it said.

In ad­di­tion, there is no ded­i­cated dis­tri­bu­tion net­work of sales agents and banks, un­like unit trusts, where re­wards come in the form of lu­cra­tive sales charges.

“In more de­vel­oped mar­kets, fee-based dis­tri­bu­tion of funds are more preva­lent com­pared with com­mis­sion-based sales force and this has ben­e­fited ETFs in th­ese coun­tries,” it added.

In terms of in­vestor aware­ness, Bursa Malaysia said it is still at low lev­els among both re­tail and in­sti­tu­tional in­vestors.

De­spite th­ese chal­lenges, the Malaysian ETF mar­ket has al­ready achieved record highs in terms of turnover and as­set size. At the in­ter­na­tional level, Malaysia has been recog­nised as the leader in terms of syariah-com­pliant ETFs.

Based on ETFGI’s De­cem­ber 2015 fig­ures quoted by IFN, Malaysia has the most num­ber of syariah-com­pliant ETFs in the world, ac­count­ing for 25% of the global syariah-com­pliant ETF seg­ment with a com­bined value of US$88.7 mil­lion.

The Malaysian ETF mar­ket has grown from five ETFs in 2013 to six ETFs in 2014 and eight ETFs in 2015. How­ever, it has re­mained stag­nant since then, with the num­ber of ETFs still at eight as of July this year.

In terms of par­tic­i­pa­tion rate, ETF trad­ing turnover in 2013 stood at RM136 mil­lion and dropped to RM59 mil­lion in 2014 be­fore ris­ing to RM487 mil­lion in 2015. Trad­ing turnover year-to-date up to July this year stood at RM746 mil­lion.

Mean­while, the to­tal value of ETF as­set un­der man­age­ment (AUM) has grown steadily over the years, from RM1.004 bil­lion in 2013 to RM1.015 bil­lion in 2014 and RM1.72 bil­lion in 2015.

The to­tal value of ETF AUM this year up to July stood at RM2.46 bil­lion.

“Based on global and re­gional ETF growth trends, as well as the re­cent growth of the Malaysian ETF in­dus­try, we be­lieve the out­look is pos­i­tive for the next five years,” said Bursa Malaysia.

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