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By Michael Eboh
The International Organization of Securities Commissions, IOSCO, has cautioned capital market regulators and stock exchanges around the globe on the need to exercise prudence in their roll out of Exchange Traded Funds, ETF, due to the various risks associated with this type of investment vehicle.

ETF is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

ETFs experience price changes throughout the day, like stocks, as they are bought and sold.

According to a statement by IOSCO, signed by Carlta Vitzthum, the risks associated with ETFs include: risks of shock transmission, misconduct and financial stability risks.

To this end, IOSCO said it is proposing 15 principles against which both the capital market industry and regulators can assess the quality of regulation and industry practices relating to ETF.

The principles, according to IOSCO, will help in ensuring investor protection, sound functioning of financial and capital markets and financial stability.

IOSCO confirmed that interest in ETFs has increased worldwide as evidenced by the significant amount of money invested in these types of products over the years.

'This dynamic growth has drawn the attention of regulators who are concerned about the potential impact of ETFs on investors and the marketplace,' Vizthum stated.

To address these concerns, he said, IOSCO has published a consultation report, titled: 'Principles for the Regulation of Exchange Traded Funds', which examines the key regulatory issues regarding ETFs.

He explained that the report proposes 15 principles that reflect a level of common approach and are a practical guide for regulators and industry practitioners.

According to him, the proposed principles address ETFs that are organised as Collective Investment Schemes (CIS) and are not meant to encompass other Exchange-Traded Products (ETPs) that are not organised as CISs.

Vitzthum stated further, 'Fourteen of the proposed principles are categorised under the following three headings: Principles related to ETF classification and disclosure; Principles related to Marketing and Sale of ETF shares and Principles related to the structuring of ETFs.

'The Consultation Report also considers the potential broader risks to financial stability arising from ETFs and other ETPs. It suggests that regulators should bear in mind that recommendations made for the ETF industry may be applied elsewhere to other areas of financial services.

'These potential broader risks include the following: Risks arising on secondary markets (the risk of shock transmission); ETFs and market integrity (risk of misconduct) and risks to financial stability.

'The 15th principle for the regulation of ETFs relates to the broader risk of liquidity shocks and transmission across correlated markets.

The Nigerian Stock Exchange, NSE, had last December listed the first ETF - ABSA NewGold ETF, with a total market value of N1.01 billion.

During the listing, Chief Executive of the NSE, Mr. Oscar Onyema, said the Exchange is envisaging a growth in the global ETF market in the years ahead with a positive spill over effect in emerging markets.

He noted that the NSE is positioning itself to benefit from the projected growth of the ETF market.