HSBC: FSA must force firms to tag ETFs that use derivatives

HSBC head of exchange traded funds Farley Thomas is calling on the FSA to force providers of swap-based ETFs to clearly identify which of their funds use derivatives.

In November, Hong Kong regulator the Securities and Futures Commission introduced a req-uirement for ETFs that use derivatives to have the marker X in their name. Thomas says a similar system should be implemented in the UK. He says: “We have had some investors who were not able tell if their investment is swap-based or not. It would be a good start for the UK to have a system similar to Hong Kong.”

Thomas says HSBC has no plans to launch a swap-based ETF. He says: ” Given all the questions over them, it would be prudent for us not to enter the market. Swap-based ETFs are not understood by investors, even people in the industry have difficulty understanding them.”

Last week, the Serious Fraud Office launched a review into how ETFs are marketed and if it has the capability to prosecute for wrongdoing in the industry.

In March 2010, the US’s Securities and Exchange Commission stopped approving swap-based ETFs while it conducts a review.

AWD Chase de Vere head of communications Patrick Connolly says: “In the UK, investors do not realise that different ETFs use different strategies and we are reluctant to invest in them because of that. Categorising swap-based ETFs in the label is a good start but asset managers need to spell out to advisers how different types of ETFs work.”

An FSA spokeswoman says: “We are concerned about whe-ther synthetic ETFs are suitable for retail investors and are looking at the issue.”