ASX eyes larger share of active fixed income ETFs

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In its biggest ETF listing rule change in more than five years, ASX is expanding the universe of fixed income strategies it will accept for ETF listings.

The changes to the AQUA rules, which are expected to come into effect on September 22, will allow fixed income managers holding fixed income securities that are not part of an index to be considered for the ASX registration as an ETF.

For example, fixed income funds with holdings in asset-backed securities and mortgage-backed securities will now be able to seek an ETF listing on the ASX.

“The asset must have a reliable pricing framework, and that is defined by being rated by Bloomberg, Reuters or others. [and]then they can be put into a product. They must make sure that they can satisfy [daily]redemption requests and be unlimited, ”said Andrew Weaver, senior director of investment products at ASX.

“This will benefit active managers because generally the rules – as they were – generally thought of asset managers looking to track an index.”

The exchange will also consider ETF applications from private debt funds, which in recent years have turned to open rather than closed structures.

“It will depend on our assessment whether we think the fund will be open and be able to [service]redemption requests, ”Weaver said.

ASX chief investment officer Andrew Campion said that while the opportunity to trade the rule change is hard to quantify, he expects it to be significant.

“We don’t have a precise number in terms of an addressable universe … But we probably missed five or ten [ETFs] over the past two or three years, some by boutique managers and some by the world’s largest fixed income managers, ”said Campion

“Fixed Income is one of the fastest growing segments of the FTE market in Australia, so we hope there is a multi-billion dollar market. “

Australia’s first ETF listed on ASX 20 years ago. At the time, the exchange used the existing listing rules for ETF shares. In 2008, it implemented a rulebook specifically for ETFs, managed funds and structured products called AQUA.

The AQUA rules started with equity ETFs. Over time, they have been revised to include frameworks for rate ETFs (in 2012) and then for active ETFs.

In recent years, the competing Chi-X exchange has attracted many fixed income ETFs. ASX rule changes allow it to compete on an equal footing with Chi-X to attract active fixed income managers.

“I think people should be in favor of [the new rule]. The last thing you want is to have varying degrees of oversight and [then]you can come up with a bit of a race to the bottom in terms of the rules. I think most fund managers should be happy with the rule change, ”Campion said.

“We don’t want to be competing on the rule books. We can compete on other things. The two things we would point out to a potential manager looking to bring a product to market are our connectivity to the market. [with brokers and intermediary channels]and the brand, ”he said.

Chi-X was not available for comment.


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