KUALA LUMPUR: Exchange-traded fund (ETF) managers will no longer be required to go through principal advisers to submit their applications for new issuances of the investment products in Malaysia from now on.
Under a set of new guidelines issued by a taskforce led by the Securities Commission (SC), direct submission by ETF managers to the SC and Bursa Malaysia will be allowed with immediate effect. The move is aimed at lowering the cost of ETF issuances.
Other initiatives and recommendations under the taskforce, which are aimed at attracting greater participation and incentivising issuances by ETF managers in the Malaysian market, will be implemented in stages, with full implementation expected by the end of 2017.
ETFs are investment funds traded on stock exchanges like equities. They invest in a basket of stocks or bonds or other instruments that track the performances of an index.
While ETFs are gaining popularity in many major markets around the world – due to their relatively low fees, better transparency and greater control offered to investors – the pace of growth of such investment product in Malaysia has been slow.
First introduced to the Malaysian market in 2005, there are now only eight ETFs listed on Bursa Malaysia with only three ETF issuers, namely AmInvestment Services Bhd, i-VCAP Management Sdn Bhd and CIMB-Principal Asset Management Bhd.
As at Dec 31, 2016, the eight ETFs in Malaysia had a market capitalisation of RM1.9bil.
According to industry players, the chief reason for the unpopularity of ETFs in the country is the lack of understanding of the product among the Malaysian public. In addition, some fund managers are said to be less interested in promoting ETFs due to the products’ relatively low management fees.
Therefore, to spur the sustained development and competitiveness of the Malaysian ETF market, the SC-led taskforce, comprising Bursa Malaysia, fund managers, market makers and institutional investors, yesterday announced a set of new initiatives to facilitate issuances and investments, enabling product innovation and intensifying investor engagements.
Among the key recommendations which would be implemented in phases are the lowering of the minimum capital requirement for ETF issuers to RM2mil from the current RM10mil, and reducing the time to market in the issuance process to encourage more issuers.
On that note, 2018 would likely be a significant year in terms of new issuances of ETFs in Malaysia.
In a statement, SC managing director of development and Islamic markets Zainal Izlan Zainal Abidin said: “The recommendations seek to enhance the ecosystem and drive further growth of the ETF industry in Malaysia.
“SC will work with relevant stakeholders to implement these measures and develop a more vibrant ETF market that provides greater opportunities and options for investors and issuers as well as promotes more inclusive participation in the Malaysian capital market,” Zainal Izlan, who is also chair of the taskforce, added.
Meanwhile, the taskforce also recommended the broadening of the ETF distribution channels by permitting financial institutions, online platforms and financial planners to offer ETFs to clients via stockbroking companies.
The use of such alternative distribution channels was expected to provide investors greater access to a more diverse range of products at a lower entry cost.
To encourage product innovation, on the other hand, the taskforce would facilitate the introduction of new types of ETFs, such as futures-based and commodity-based ETFs.
It would also recommend greater flexibility in terms of investment strategies such as the introduction of leveraged ETFs, that is the financial derivatives and debt to enhance the returns of an underlying index; and inverse ETFs, that is the use of various derivatives to profit from a decline in the value of an underlying benchmark.
In recognising the important role of market makers in the ecosystem in providing trading liquidity of ETFs, it was recommended for the SC and Bursa Malaysia to provide rebates amd waive relevant fees applicable to ETF market makers, including a 100% clearing fee rebate by both the SC and Bursa Malaysia.
On its part to increase investor awareness and broaden their understanding of ETFs, Bursa Malaysia would intensify its nationwide roadshows and education programme to attract participation and to ensure that investors are knowledgeable and well-equipped in trading ETFs.