ASIC Allows ETF Issuers to Use Overseas Market Makers

ETF issuers will now be able to use overseas market makers following an update to an ASIC class order around the investment products.

June 22, 2021, | AtoZ Markets – The Australian Securities and Exchange Commission (ASIC) has updated its class order on exchange traded funds (ETF) to allow ETF issuers to use overseas market makers.

In a statement, the regulator said it has made ASIC Corporations (Amendment) Instrument 2021/299 (Amending Instrument) to amend Class Order 13/721 [CO 13/721] (Class Order). The Amending Instrument removes the requirement in the Class Order that an authorized participant must be an Australian resident for tax purposes.

The Amending Instrument removes a regulatory barrier to entry for offshore market-making entities seeking to participate in the Australian ETF market and, as a result, may encourage new entrants to the ETF market-making sector.

Why ASIC is relaxing rules for ETF issuers

ASIC recognizes that authorized participants perform an essential market-making function in the market for ETFs, and that competition between market makers facilitates market efficiency and can produce benefits for retail investors.

The corporate watchdog made the Amending Instrument after reviewing the local authorized participant requirement and consulting interested stakeholders.

ASIC found that the local authorized participant requirement does not support competition or market efficiency in the ETF market-making sector. ASIC found that the requirement may lead to suboptimal outcomes for retail investors trading on the secondary market, particularly due to wider buy-sell spreads than could be expected in a more competitive market.

The Class Order modifies provisions of the Corporations Act 2001 as they affect responsible entities who are issuers of ETFs quoted on the financial market operated by ASX Limited or Chi-X Australia Pty Ltd.

The Class Order allows those responsible entities to restrict fund withdrawals to authorized participants only, and to provide index or portfolio information to authorized participants before the information is provided to other members (equal treatment relief).

The equal treatment relief in the Class Order was previously only available in circumstances where an authorized participant engaged by a responsible entity was an Australian resident for tax purposes. The Amending Instrument removes this requirement.

ASIC consulted with a number of ETF issuers and market makers, as well as the Australian Tax Office, as part of this review.

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