The Canadian Securities Administrators (CSA) has launched a consultation on the exchange-traded fund (ETF) regulatory framework and encouraged stakeholders to respond to its consultation paper within the comment period ending on Oct. 17.
The CSA’s consultation paper, available on its members’ website, suggests improvements to Canada’s ETF regulatory framework. The consultation seeks insights on investor access to US ETFs through brokerage accounts and exposure to US and other foreign ETFs via publicly offered investment fund holdings.
In 2023, the CSA started reviewing the current ETF regulations to learn more about their continued propriety and ETFs’ unique characteristics, including secondary market trading, authorized dealers’ creation and redemption of ETF units, and the underlying arbitrage mechanism of ETFs.
The CSA noted that ETFs saw significant growth in Canada over the past decade. There are over 1,200 ETFs, with assets under management reaching $518 billion by the end of last year. Retail investors have increasingly participated in ETFs and trading activity over the past five years. The CSA said it expects interest and investment in ETFs to continue rising.
“ETFs are an increasingly important investment vehicle for Canadians, providing investors with access to a wide range of investment exposures and strategies and offering intraday liquidity,” said Stan Magidson, the CSA’s chair and Alberta Securities Commission’s chair and CEO, in the news release.
“This consultation will provide the CSA with important insights into the unique regulatory considerations for these products,” Magidson added in the CSA’s news release.
The CSA’s consultation paper reflected the findings of a detailed study on the Canadian ETF market conducted by the Ontario Securities Commission (OSC)’s thought leadership division and the “Good Practices Relating to the Implementation of the IOSCO Principles for Exchange Traded Funds,” published by the International Organization of Securities Commissions.
OSC’s ETF study
The OSC’s study, published concurrently with the CSA’s consultation paper, looked into ETFs’ liquidity and arbitrage mechanism in Canada, with a focus on the following areas:
- ETF secondary market liquidity
- the effectiveness of the arbitrage mechanism in ensuring that ETF market prices reflect their net asset value (NAV)
- potential drivers of ETF liquidity and the arbitrage mechanism
In its news release, the OSC noted limited research on how Canada’s ETFs have functioned in recent times despite the significant growth in this area.
“ETFs have become popular among a broad spectrum of investors and have proven resilient in the face of recent financial and macroeconomic events,” said Grant Vingoe, OSC CEO, in the news release. “By using data-driven insights, we can better tailor policies to protect investors while fostering a robust ETF market.”