ETF Rule Q&A: Steve Oh, Nasdaq

Steve Oh is Head of ETF Listings at Nasdaq.

How has the ETF rule affected the ETF market? What is the main takeaway?

Steve Oh, Nasdaq

The ETF Rule, or Rule 6c-11, was approved by the SEC in December 2019. Prior to the ETF Rule, new ETFs had to go through an often lengthy and costly approval process because of its unique structure that didn’t perfectly fit within existing regulations covering investment vehicles. Due to the growing popularity of ETFs and new ETF filings that needed to be expedited, the ETF Rule was passed after a successful collaboration between the SEC and the ETF industry. While all eligible ETFs must become compliant by the December 22, 2020 deadline, Rule 6c-11 has already made the entire process of launching most ETFs simpler, quicker and cheaper. The work that Nasdaq and the other ETF-listing exchanges did fosters greater competition and innovations.

Who are the beneficiaries of the ETF rule?

Once the ETF Rule goes fully live on December 22, investors, issuers, and exchanges alike will all be beneficiaries. Investors, especially retail, will see the biggest benefits from more choice, greater competition and enhanced investor protections from heightened and easily accessible website disclosures. ETF issuers will be able to more easily launch ETFs and have more streamlined compliance requirements. And with the barriers to market entry reduced, exchanges will benefit from increased listings from new issuers along with increases in trading volume.

Is there any downside to the new rule, i.e. unintended consequences?

ETF issuers have a lot of work to build and maintain the required investor protection disclosures between now and when the rule is effective this December, but the work will be well worth it due to fostering greater trust in using ETFs. A couple of areas that are expected to face challenges with new and more complex ETF issuance come in education and market-making bandwidth. With more than 2,400 currently listed ETFs and growing, accurate and more easily accessible content is needed to help investors wade through all the choice to make informed decisions. Nasdaq is taking a lead role in these educational efforts including digital educational content generation, a robust webinar series, data driven research and our annual ETF education conference ‘Synapse.’ Even as ETF market makers do a good job providing liquidity for all these ETFs, Nasdaq is positioning to stay ahead by making changes to our ETF market making programs to help market makers support new ETF products.

Will the rule affect ETF trading/liquidity?

ETFs have shown through good times and bad that overall they remain very liquid, and that won’t change. In the early conceptual stages of the ETF Rule, the SEC was initially concerned about removal of the Indicative Optimized Portfolio Value (IOPV) requirement because this was initially established to assist with fair value pricing transparency to assist market maker arbitrage. The unanimous feedback from ETF trading experts was that IOPV was no longer useful for market maker arbitrage due to technology advancements. Therefore, both the SEC and ETF industry agree there will be no impact to ETF liquidity from the removal of IOPVs.

Has the ETF rule accelerated growth in the ETF market?

Starting later in 2020, the ETF Rule combined with SEC approval for semi and non-transparent actively managed ETFs will likely lead to a new wave of innovative product types coming to market, which taps both our ETF listings business and our index licensing business. With investor awareness and demand growing for the intra-day liquidity, low cost and tax efficiency benefits of ETFs, more ETFs will come to market to meet investor needs. ETFs proved themselves incredibly resilient during the most recent market volatility; the massive outflows some might have expected did not materialize. Our index licensing business continues to see adoption of index investing all over the globe, particularly with sponsors launching vehicles that track the Nasdaq-100 index.

How has Nasdaq adapted to the new rule?

In early April 2020, Nasdaq received the first approval for a new set of generic listing standards for ETFs eligible under Rule 6c-11. All eligible ETFs will need to be compliant with Rule 6c-11 and be listed under Rule 5704 by December 22nd of this year. This is a significant development for the industry and for Nasdaq as more than 90% of our listed ETFs will be listed under the new rule. We have designed a process that makes for a smooth experience for the issuers and also provides us with the information we need to confirm compliance and protect investors. This includes a streamlined process for ETF issuers’ compliance-related submissions and notifications. Nasdaq continues to work with the SEC to ensure that our rules protect investors and support ETF formation and trading.