The European Securities and Markets Authority has published its long-awaited consultation paper on ETFs, extending proposals to all Ucits vehicles engaging in ETF-like practices.

The move to widen the scope of the consultation paper was made by Esma after the ETF industry said it should not be unfairly singled out by the European regulators.

Esma said it had taken into account 65 contributions to its July 2011 discussion paper on the topic and in outlining draft future rules was "proposing to reinforce the legal framework applicable to ETFs and other types of Ucits".

"The aim of these guidelines is to enhance investor protection and limit the risk of certain practices by strengthening, in particular, the standards applicable to collateral received in the context of activities such as securities lending," said Steven Maijoor, Esma chairman.

Specifically, Esma proposed investors should be provided with more information if the Ucits ETF does not track an index and is “actively” managed.

For index-tracking Ucits of all types, it said there should be additional disclosure requirements on issues such as the index to be tracked, the method of replication and the tracking error. The regulator is also seeking feedback on what an appropriate regime for secondary market investors would be.

Also within the paper, Esma mapped out further requirements for securities lending and collateral management, which included that diversification of counterparty risk and haircut criteria should be strengthened.

Further debate needed

Some issues have been held back for further consideration, such as general concern surrounding the increasing number of "complex" products sold to retail investors and the lack of regulatory convergence on the management of such products.

Esma reiterated the need to tackle this issue and added it would continue to contribute actively to the regulatory response to these problems.

MJ Lytle, managing director at Source, said: "After a year's debate, here's a balanced paper. It is long, it is in depth and it lays out the issues that have been raised from all quadrants and really does not feel like it has a slant. Esma very clearly wants to explore these issues as deeply as possible to make a good decision.”

The consultation period will run until 30 March, with comments from the industry welcomed. Esma expects the final guidelines to be ready for adoption by mid-2012.