Alex Kreonidis | Bloomberg Law Senate Subcommittee on Securities, Insurance, and Investment, Market Microstructure: Examination of Exchange-traded Funds (ETFs) (Oct. 19, 2011) The Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking, Housing, and Urban Affairs held a hearing that sought to address whether market regulators are dealing effectively with the growth and risks of ETFs. Witnesses testifying at the hearing included (1) Eileen Rominger, Director of the Division of Investment Management, Securities and Exchange Commission (SEC); (2) Eric Noll, Executive Vice President and Head of Transaction Services, Nasdaq OMX (Nasdaq); (3) Noel Archard, Managing Director and Head of U.S. iShares Product, BlackRock, Inc. (BlackRock); and (4) Harold Bradley, Chief Investment Officer, Ewing Marion Kauffman Foundation (Kauffman Foundation). Rominger provided a useful overview of ETFs and recent SEC developments. Archard raised an interesting proposal for SEC consideration that would impose a new classification system on ETFs and other exchange-traded products (ETPs). Notably, Archard and Noll also addressed ETFs in the context of market volatility, while Bradley presented contrasting views on the risks that ETFs pose to small cap issuers and the market as a whole.
ETFs and Other ETPs Generally
For example, with respect to a simple U.S. equity index-based ETF, if the price of the underlying stocks comprising the index is below the price of the ETF shares, a market maker who is an Authorized Participant can buy the underlying stocks and short the ETF. Then, at the end of the day, the Authorized Participant can buy shares of the ETF in-kind through the creation process using the underlying stocks purchased earlier in the day. In return, the Authorized Participant receives shares of the ETF that can be delivered against the short ETF position.
Leveraged, Inverse, and Inverse Leveraged ETFs
Recent Regulatory Guidance and Initiatives
BlackRock's Proposed Classification System
Market Volatility, Capital Formation, and Settlement Issues
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