The funds have been renamed ‘UCITS ETFs’ in accordance with regulatory requirements in Ireland and benefit from a dual ETF and unlisted index fund structure. The firm wrote that the issuing of the new share classes ‘will meet growing investor demand for flexibility, by offering listed and unlisted share classes through a single fund in a move designed to increase investor choice. The move will allow clients that prefer ETF structures to access funds with significant assets under management (AUM) and a strong track record.’
Stephen Carson, partner at A&L Goodbody, comments that 2018 saw the Central Bank of Ireland update their UCITS framework to allow ETF and non-ETF share classes in the same sub-fund and that HANetf have been structuring their ETFs in this way for a number of years.
The HSBC development is significant because they added ETF share classes into their unlisted UCITS funds.
There is a further anomaly in the regulations which means that the ESMA guidelines require the ETF issuer to use the “UCITS ETF” identifier in the name of the fund. “If you think of a large unlisted sub-fund adding an ETF share class, it is anomalous to have to change the name of the fund,” Carson says. “ESMA is aware of this and hopefully it is something that they might look at in the future. In the meantime, it is something which a traditional UCITS fund manager who wanted to launch ETF share classes in an unlisted fund, would have to take into account.”
Carson also noted that HSBC listed fixed income sub-funds as ETFs, rather than equity funds. This is significant because an issuer with listed and unlisted share classes which have US equity exposures would have to have a process to monitor the level of trading activity in the funds to ensure that the level of trading would not fall below the threshold required to access the treaty benefits.
Another angle to this new development that Carson points out is that the overseas fund regime in the UK hasn’t started yet, restricting the ability to register new ETF platforms for sale in the UK. However, if it is an existing fund that is now offering an ETF class and has the benefit of the temporary marketing permissions regime, it’s good to go.
“I think it will create another avenue for non-ETF managers to dip their toe into the ETF market,” Carson says.
Full article on ETFs as a share class developments in the US and Europe is available online.