The popularity of exchange-traded funds (ETFs) has accelerated rapidly in recent years, but so have their complexity, and regulation has struggled to keep pace, according to new research from Calastone.
As the assets managed by ETFs globally surpasses $12.7trn, Calastone found that 40% of asset servicers want the increasing complexity of these products to be addressed.
The firm’s product director David McGuinness said the ETF industry is at a “pivotal moment” where automation and standardisation should be a top priority to ensure its continued success.
“In the primary market on which ETFs are created, we see many of the problems that we are working to solve in mutual funds,” he said.
“Most asset servicers rely on outdated technology designed for mutual funds, but adapted for ETFs. These individual systems desperately need standardisation, too often still involving manual processes and spreadsheets, resulting in inefficiencies and higher operational risks.”
These issues have been exacerbated by the new T+1 settlement cycle in the US, which shortens the settlement period following a trade from two business days to one.
Calastone found that 38% of ETF issuers see the move to T+1 settlements as the biggest challenge to ETF primary market servicing.
McGuinness said: “These changes create mismatches in settlement cycles and increase the complexity of managing ETFs across different markets. Authorised participants must now navigate different settlement cycles across various markets, increasing operational complexity and costs.”
Europe could follow suit in adopting a T+1 settlement cycle which could offer standardisation across markets, but in the meantime, 86% of respondents said the cost and speed of making change requests was a concern for their business.
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