Nasdaq OMX files with SEC to permit listing and trading of non-transparent ETFs

Feb 17th, 2014 | By | Category: ETF and Index News

The Nasdaq OMX Group has filed with the US Securities & Exchange Commission (SEC) for a proposed rule change to permit the listing and trading of exchange-traded managed funds (ETMFs).

Nasdaq OMX files with SEC to permit listing and trading of non-transparent active ETFs

Nasdaq OMX has filed with the SEC to permit the listing and trading of non-transparent, actively managed ETFs.
(© The NASDAQ OMX Group, Inc.)

The Nasdaq OMX filing complements the previously announced application for exemptive relief to permit the offering of ETMFs as filed by Eaton Vance, creator of the ETMF structure, on March 27, 2013 and most recently amended on January 23, 2014.

ETMFs are a proposed new type of open-end fund designed to bring the performance and tax advantages of exchange-traded funds (ETFs) to active investment strategies, while maintaining the confidentiality of current portfolio trading information.

As described in the proposed rule change, ETMFs would trade on Nasdaq Stock Market at prices directly linked to the fund’s next-determined daily net asset value (NAV), using a new trading protocol called “NAV-based trading.” In NAV-based trading, prices would vary from NAV by a market-determined premium or discount, which may be zero. Because ETMFs would provide market makers with opportunities to earn reliable arbitrage profits without intraday hedging of their inventory positions, they can be expected to trade at consistently tight spreads to NAV in the absence of full holdings disclosure.

Active fund managers have to date largely avoided introducing their leading strategies as transparent ETFs because the required daily holdings disclosures can facilitate front-running of portfolio trades and enable other investors to replicate the fund’s portfolio positioning and exploit its research insights. By removing the requirement for daily portfolio transparency, ETMFs can potentially enable investors to access a broad range of proven active strategies through a vehicle that provides the investor benefits of an exchange-traded fund.

Eaton Vance seeks to launch a family of ETMFs that mirror existing Eaton Vance mutual funds and to license the underlying technology to other fund groups through Navigate Fund Solutions, a wholly owned subsidiary of Eaton Vance. Aspects of ETMFs and NAV-based trading are protected intellectual property subject to issued and pending US patents.

“Today’s action by Nasdaq OMX to file for a rule change permitting the listing and trading of ETMFs is a further milestone in seeking regulatory approval for ETMFs,” said Stephen W. Clarke, President of Navigate. “In collaboration with our partners at Nasdaq OMX, we continue advancing this innovative fund structure toward approval and launch.”

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