In particular, the ETF businesses of some European investment banks are seen as likely targets of sale or closure as their parent companies look for places to cut costs.
Isabelle Bourcier, head of business development at Ossiam, the ETF arm of Natixis Global Asset Management, said the fundamental reason behind the consolidation would be the lack of liquidity in the market.
She said ETF businesses require a lot of capital to set up and run and each ETF launched also requires seed capital.
So if a bank is trying to shore up its balance sheet to fulfil Basel III liquidity requirements it could look to redeem funds sitting in ETFs – a motivation that is likely to intensify if muted inter-bank lending continues.
Synthetic vs. physical
Jose Garcia Zarate, ETF analyst at Morningstar said the consolidation issue could also be split down the lines of synthetic and physical ETFs as generally speaking most synthetic ETFs come from investment banks and most physical ones from asset managers.
He said 2012 was due to be the year regulators came out on ETFs and if synthetic ETFs were their target investment banks’ product ranges could well suffer.
"It’s difficult to say anything at the moment because we do not know what regulators are going to say. They are looking into synthetic structures, classifying risk, and the whole issue of counterparty risk. We could see the synthetic side of the industry finding it difficult to grow in the future."
Unsurprisingly, cost is also likely to be a limiting factor for the investment banks. Steve Doran, fund manager at HSBC Global Asset Management, explained that for an asset management firm there is not a great deal of additional cost to running an ETF mandate because the structure to support a mutual fund offering is already present.
An investment bank on the other hand, does not necessarily have the parallel mutual fund operations in place.
A final factor that will effect both regulation and cost is the event of RDR, which Justin Urquhart Stewart and marketing director at 7IM, said would see charges come down and margins squeezed.
As competition to offer cheaper product ranges intensifies, he added, some providers would simply be priced out of the market.
