Alain Dubois, Chairman of Lyxor Asset Management, talked earlier this week to Paul Amery, editor of IndexUniverse.eu, about changes in European fund regulations and the likely impact on the exchange-traded fund business.

IU.eu: Alain, there’s a lot happening on the regulatory front in Europe. UCITS IV will be implemented next year, MiFID is being updated, and everyone is awaiting the Alternative Investment Fund Managers (AIFM) Directive. How would you summarise what’s going on?

Dubois: The key trend is towards greater European coordination. Regulations will become much more harmonised across Europe than is currently the case; right now we still have a lot of rules that are applied on a national basis. The AIFM directive, when it is passed, should add to this process of harmonisation.

IU.eu: One of the key parts of UCITS IV is the concept of a single management company passport, allowing UCITS funds authorised in one EU member state to be managed remotely by a management company in another member state. Will the likely reduction in distribution costs lead to ETFs becoming cheaper?

Dubois: Both the simplification of the product “passport” and the possibility of using a single asset management company “passport” across the region should lead to some savings. However, these savings are not enormous. Simplifying the procedure for passporting a fund from one country to another will shorten the delay we currently face when marketing and listing an ETF in additional countries in Europe. However, the costs of cross-listing on different exchanges will remain.

It’s also not clear to what extent fund managers will really use the asset management company passport. There will be some cost savings, in that managers will be able to avoid the use of a local intermediary and manage funds from their home base, but these savings will also be relatively small. A lot of fund managers will also wish to retain the structures they have set up in Dublin or Luxembourg, for example, to manage funds.

IU.eu: During your presentation at the Inside ETFs Europe conference last month you mentioned that you expect UCITS IV to harmonise the regulations on counterparty and collateral exposures. Do you still expect this to happen?

Dubois: The regulation of the use of derivatives and counterparty risks in UCITS funds is something that has already taken place at “level 2” [“level 2” is the term applied to “implementing measures” that detail how European Commission directives are to be put into force – IU.eu comment]. There are also consultations taking place right now under the auspices of CESR (The Committee of European Securities Regulators) at “level 3” [“level 3” regulatory guidelines are not legally binding but act as a means of coordinating member states’ implementation of EU law – IU.eu comment], with answers to the consultation process due to be submitted by the end of May.

We are clearly heading towards greater harmonisation in this area of fund management, which is quite important. CESR consultations also provide that securities lending agreements should be taken into account, in the same way as derivatives, when computing the overall exposure of a fund.

IU.eu: At the conference you said that ETF providers will have to offer full transparency to investors regarding daily counterparty risk exposures (whether through the use of swaps in ETFs, or through securities lending), as well as full transparency on collateral exposures (for funds using both synthetic and full replication). Are you saying that the CESR regulations may not enforce this?

Dubois: The regulations are not so much about transparency as about risk. They set limits on counterparty risk, and at the moment these limits are interpreted differently in different European countries.

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