CSA to complete ETF review this fall

Kelemen said the CSA expects to complete its review in autumn 2024 and publish a consultation paper in 2025.

She added that stakeholders will have “an opportunity to comment on our analysis and any initial policy proposals before any specific changes to the regulations are proposed.”

The CSA began its review of ETF regulation in August 2023 with the aim of assessing the adequacy of existing rules.

At the time, industry observers believed regulators had launched the review primarily as a policy check to ensure ETF regulation was fit for purpose. The CSA had previously completed an exercise to modernize the regulation of mutual fund products.

The review comes as ETFs are gaining a larger share of the investment fund market.

According to the Investment Funds Institute of Canada, ETF AUM stood at $429.2 billion as of May 31 (compared to nearly $2.1 trillion in mutual funds), or about 20% of mutual fund assets in Canada. That’s up from 18% a year earlier.

In parallel with the ongoing review, CSA members examined the Independent Review Committees (IRCs). All investment funds in Canada — including ETFs — are required to have an IRC, which assesses any potential conflicts reported to them by the fund manager.

In March, the Ontario Securities Commission and the Autorité des marchés financiers released the results of a continuous disclosure review that focused on IRCs of investment funds managed by 24 fund managers. The review suggested that IRCs broaden their definition of conflicts of interest and refresh their ranks more frequently.

ETF regulation has also attracted interest outside Canada.

In May 2023, the International Organization of Securities Commissions (IOSCO) published the results of a review showing that the global rules for regulating ETFs – finalized in 2013 – remain solid.

“No major vulnerabilities were identified, and no major regulatory issues were raised by IOSCO members or industry participants,” the report reads.

The CSA indicated that the review would examine some of the areas covered by IOSCO’s scrutiny, including the process for creating and redeeming ETF units, the arbitrage mechanism that aligns the trading price of an ETF with the value of the underlying assets in its portfolio, and the use of volatility controls (such as circuit breakers) in secondary market trading.

With files from James Langton