The Central Bank Of Ireland Permits Semi-transparent ETFs

The Central Bank of Ireland has amended its rule requiring full daily public portfolio disclosure by UCITS ETFs by allowing UCITS ETFs to opt to disclose portfolio information to the public on a quarterly basis.

ETFs that disclose portfolio information to the public on a less than daily basis are commonly referred to as semi-transparent ETFs.

The ability to use a semi-transparent structure is likely to be of particular interest to managers of strategies that have to date avoided using the ETF vehicle for their funds due to concerns that full visibility of the fund's portfolio would enable other market participants to reverse-engineer proprietary portfolio management and trading techniques. Such concerns are likely to have been particularly prevalent among active managers concerned with the potential for "front-running" or copying of their strategies.

The Central Bank's revision of the portfolio transparency rule is a very welcome and timely development which broadens the types strategies that can be delivered to investors in the form of an ETF, particularly in light of an increasing number of active managers considering using the ETF vehicle.

The new portfolio transparency requirements for UCITS ETFs

The new Central Bank rules require that UCITS ETFs and UCITS with ETF share classes disclose their portfolio holdings and weightings to the public on either a daily basis or on a less frequent periodic basis.

Full portfolio holdings disclosed daily

• The type of portfolio information that will be made available must be disclosed in the prospectus.
• The portfolio information must be made available on a non-discriminatory basis.

Full portfolio holdings disclosed on a less frequent, periodic basis

• Requirements in relation to the disclosure of portfolio information to the ETF's authorised participants and market makers to enable effective arbitrage:
  • Appropriate portfolio information is made available daily to facilitate effective arbitrage.
  • The type of portfolio information made available is disclosed in the prospectus.
  • The portfolio information is made available to the ETF's authorised participants and market makers on a non-discriminatory basis.
  • The ETF has document procedures to address circumstances where the arbitrage mechanism is impaired.
• Requirements in relation to the disclosure portfolio information to the public:
  • The ETF has a documented procedure for investors to request portfolio information.
  • The portfolio holdings must be disclosed at least quarterly within 30 business days of the end of each calendar quarter.

Commentary

As the regulator of the leading European ETF jurisdiction, the Central Bank has been actively engaged with the regulatory discourse on significant issues pertaining to ETFs, not least the question of the frequency of portfolio disclosure. It is accepted that daily disclosure of portfolio information is necessary for authorised participants and market makers to trade in ETF shares and underlying securities and this trading (the "effective arbitrage" reference above) is required for the effective functioning of ETFs as it ensures that the exchange price of ETF shares is reflective of the ETF's net asset value. There has been ongoing debate over the course of a number of years as to the extent and frequency with which such information should be disclosed to the public. The Central Bank opted against allowing semi-transparent structures when it considered the issue in its ETF study in 2017-2018 but stated that it remained open to continued consideration of the matter. Since then, various types of semi-transparent structures had been allowed across a number of jurisdictions and this was acknowledged in IOSCO's 2023 report on good practices relating to ETFs. The Irish Department of Finance, while acknowledging the Central Bank's thought leadership in the ETF space in its Funds Sector 2030 Report published in October 2024, also encouraged the Central Bank to consider alternative approaches to the ETF portfolio transparency requirements. The Central Bank's revision to the rule follows similar moves by France and Luxembourg.

The manner in which the Central Bank implemented the revised rule is commendable for a number of reasons:

• Unlike a number of other jurisdictions, including France and Luxembourg, the Central Bank did not limit the availability of a semi-transparent structure to active ETFs. This may be of interest to managers of passive strategies who wish to protect a competitive advantage they feel they have in the manner in which the track their indices, for example at the time of an index rebalancing.
• The Central Bank has allowed for a longer maximum period than other jurisdictions for the publication of the full portfolio, namely quarterly publication within 30 business days of the end of the quarter. This compares well against the requirements in France and Luxembourg to publish monthly with a maximum delay of one month.
• The Central Bank's requirements for the semi-transparent structure are principles-based. They recognise that the key objective of ETF portfolio disclosure is the facilitation of effective arbitrage and that public portfolio disclosure is separate to this goal. In doing so, the requirements do not prescribe how the ETF ensures that effective arbitrage is achieved or how the ETF might manage portfolio information requests from secondary market investors. This level of flexibility enables ETF managers to design their own processes that best suit their business and the ETFs that they manage.