ASIC removes local authorised participant requirement in ETF class order

ASIC has updated its class order on exchange traded funds (ETF) to allow ETF issuers to use overseas market makers.

ASIC has made ASIC Corporations (Amendment) Instrument 2021/299 (Amending Instrument) to amend Class Order 13/721 [CO 13/721] (Class Order). The Amending Instrument removes the requirement in the Class Order that an authorised participant must be an Australian resident for tax purposes.

The Amending Instrument removes a regulatory barrier to entry for offshore market-making entities seeking to participate in the Australian ETF market and, as a result, may encourage new entrants to the ETF market making sector.

ASIC recognises that authorised participants perform an essential market making function in the market for ETFs, and that competition between market makers facilitates market efficiency and can produce benefits for retail investors.

ASIC made the Amending Instrument after reviewing the local authorised participant requirement and consulting interested stakeholders. ASIC found that the local authorised participant requirement does not support competition or market efficiency in the ETF market making sector. ASIC found that the requirement may lead to suboptimal outcomes for retail investors trading on the secondary market, particularly due to wider buy-sell spreads than could be expected in a more competitive market.

Background

The Class Order modifies provisions of the Corporations Act 2001 as they affect responsible entities who are issuers of ETFs quoted on the financial market operated by ASX Limited or Chi-X Australia Pty Ltd.

The Class Order allows those responsible entities to restrict fund withdrawals to authorised participants only, and to provide index or portfolio information to authorised participants before the information is provided to other members (equal treatment relief).

The equal treatment relief in the Class Order was previously only available in circumstances where an authorised participant engaged by a responsible entity was an Australian resident for tax purposes. The Amending Instrument removes this requirement.

ASIC consulted with a number of ETF issuers and market makers, as well as the Australian Tax Office, as part of this review.

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