Europe’s new MiFID II law is seen as a game changer for the region’s ETF market, but one thing is missing that could really help it take off.
Europe’s market for exchange-traded-funds, scattered across the bloc’s dozens of countries, still lacks a single reporting source -- called consolidated tape. Without such an electronic tracker to provide real-time volume and pricing data, MiFID’s intended goal of improving transparency will be a tall order.
The Markets in Financial Instrument Directive II is being hailed for its promise to more than double ETF assets in the region to about $2 trillion in five years and help bring the market up to speed with its Goliath U.S. counterpart. The sweeping regulations will, for the first time, require every ETF transaction to be reported -- a huge change for a market currently dominated by opaque, behind-the-scenes trading.
“It would be a game-changer for volumes if we can create a consolidated tape like in the U.S. market, to provide a real overview of European ETFs,” said Stephen Cohen, who leads BlackRock Inc.’s ETF business in Europe, Middle East and Africa. “It can be challenging for investors to get a full picture of trading volumes of a product listed across multiple exchanges.”
Europe’s ETF market has lagged the explosive growth in the U.S., where assets account for more than $3 trillion of the $4.5 trillion global pie. MiFID II, aimed at creating transparency and rooting out conflicts of interest, offers hope that Europe could soon catch up.
A unified reporting system like that in the U.S. might further unleash the potential of the funds in Europe.
It may take time for investors to digest the newly reported information before we see any boom in European flows thanks to MiFID, Vanguard Group has said. Making things more cumbersome, trading venues will have to produce their own reports, says Adam Laird, head of ETF strategy at Lyxor Asset Management in London.
“This means a great number of data sources – it will be difficult, and at least time consuming, to put together a comprehensive data set on ETF traded volumes,” Laird said. “The rules mean the data must be available, but that doesn’t mean it will be simple to access. For a wealth manager and her risk managers, it could be difficult and laborious.”
Some efforts are underway within the industry to create a unified record of ETF trades in one place. European regulators say they’ll appoint a company to create a consolidated tape if a satisfactory one doesn’t exist by 2020.
Data on ETF volumes will not be served on a “silver platter,” said Antoine Lesne, head of SPDR ETF strategy & research for Europe, Middle East and Africa at State Street Global Advisors. “While the consolidated tape is still not an immediate reality, this trade reporting side of MiFID II is allowing an important step towards realizing it.”