The Australian Securities and Investments Commission (ASIC) has identified a range of risks within the country’s exchange-traded product industry that require monitoring by issuers and oversight by market operators.

ASIC’s key concern with the Australian ETP market is the potential for an ETP’s bid/ask spread to widen.

While the government body found that the ETP market in Australia is generally performing well and meeting the low cost and liquidity expectations of investors, it expressed concern at the potential for bid/offer spreads to temporarily widen, leading to investors paying a spread that would be considered too high, and undermining the relatively low cost proposition of some ETPs.

The body has called for market operators and issuers to play a more proactive role in monitoring the performance of ETPs, including liquidity in the market, and where they observe spreads widening unreasonably, should take appropriate action.

It is also recommending that ETP issuers publish the indicative net asset value (iNAV) with a frequency that enables investors and financial advisers to make more informed decisions.

ASIC Commissioner John Price said, “We encourage issuers to continue to educate investors and their advisers about how the ETP market operates and to provide them the tools, like an iNAV, to help them make informed investment decisions.”

Another area of concern identified in the report was market maker concentration, with most liquidity provided by just two entities. ASIC expects issuers and market operators to be aware of this risk and incorporate a means of managing it into their risk management framework.

While not many ETPs have closed in Australia to date, ASIC encourages issuers and market operators to develop policies for reviewing, and where necessary remove from quotation with an orderly wind down ETPs that may not meet ongoing suitability for quotation, such as very small ETPs that may be uneconomical to operate.