SC may lower issuance costs for ETFs

PETALING JAYA: The Securities Commission Malaysia (SC) is considering several initiatives, including reduction in issuance costs, in the ongoing review of its Exchange-Traded Funds (ETF) Guidelines.
According to the SC, a high-level task force has been formed to identify and deliberate opportunities and challenges as well as propose recommendations for further growth in the ETF market.
“In this respect, several initiatives are currently being considered. These include a review of the regulatory framework, widening the range of asset classes, facilitating the application of new strategies, enhancing the market making framework and reducing issuance costs,” it said in an email response to a SunBiz query.
The task force is chaired by the SC and comprises representatives from the industry, Bursa Malaysia Bhd and institutional investors.
In addition, the SC is looking to enhance collaborative promotional and educational efforts with the industry to increase the vibrancy of the ETF market.
“These efforts will unlock more opportunities for issuers, expand investor base and strengthen overall growth of the fund management industry,” it said.
Bursa Malaysia said the cost of issuance, limited number of brokers and lack of a dedicated distribution network are some of the challenges faced by ETF issuers.
“ETFs are issued by fund management companies. In this regard, the cost of issuance of ETFs is high compared to issuing conventional unit trusts. This is because ETF issuance is viewed as an initial public offering, hence the various legal and regulatory costs imposed are higher. These high costs act as a deterrence to issuances,” the regulator told SunBiz.
Bursa Malaysia said a market maker is appointed to provide liquidity to the ETFs to facilitate secondary trading as ETFs are listed but the number of brokers who are willing to carry out market making activities is limited.
“The Malaysian ETF market is still nascent and demand is still at low levels, thus not many brokers are willing to provide market making services to ETFs as they view this service to be unprofitable,” it said.
In addition, there is no dedicated distribution network of sales agents and banks, unlike unit trusts, where rewards come in the form of lucrative sales charges.
“In more developed markets, fee-based distribution of funds are more prevalent compared with commission-based sales force and this has benefited ETFs in these countries,” it added.
In terms of investor awareness, Bursa Malaysia said it is still at low levels among both retail and institutional investors.
Despite these challenges, the Malaysian ETF market has already achieved record highs in terms of turnover and asset size. At the international level, Malaysia has been recognised as the leader in terms of syariah-compliant ETFs.
Based on ETFGI's December 2015 figures quoted by IFN, Malaysia has the most number of syariah-compliant ETFs in the world, accounting for 25% of the global syariah-compliant ETF segment with a combined value of US$88.7 million.
The Malaysian ETF market has grown from five ETFs in 2013 to six ETFs in 2014 and eight ETFs in 2015. However, it has remained stagnant since then, with the number of ETFs still at eight as of July this year.
In terms of participation rate, ETF trading turnover in 2013 stood at RM136 million and dropped to RM59 million in 2014 before rising to RM487 million in 2015. Trading turnover year-to-date up to July this year stood at RM746 million.
Meanwhile, the total value of ETF asset under management (AUM) has grown steadily over the years, from RM1.004 billion in 2013 to RM1.015 billion in 2014 and RM1.72 billion in 2015.
The total value of ETF AUM this year up to July stood at RM2.46 billion.
“Based on global and regional ETF growth trends, as well as the recent growth of the Malaysian ETF industry, we believe the outlook is positive for the next five years,” said Bursa Malaysia.