In a move to improve competition and market making efficiency in the Australian exchange traded fund (ETF) market making sector, the Australian Securities and Investment Commission (ASIC) is now permitting ETF issuers to use overseas market makers.
Following consultation with ETF issuers and market makers, and the Australian Tax Office, ASIC has made ASIC Corporations (Amendment) Instrument 2021/299 to amend ASIC Class Order [CO 13/721] (Class Order), effectively removing the requirement that ‘authorised participants’ under the Class Order be Australian residents for tax purposes.
So, what’s the big deal?
The change removes a key regulatory barrier to entry for offshore market makers seeking to participate in the Australian ETF market, with ASIC hoping to address the existing concentration of market makers currently operating in Australia. As well as the valuable expertise international participants are likely to bring to the Australian market, ASIC considers that the opening of the Australian market to offshore ETF market makers will assist in improving market efficiency and therefore result in better outcomes for retail investors. More competition among market makers is expected to narrow down buy-sell spreads to obtain greater market share and lower transaction costs.
Foreign market makers will have the benefit of the equal treatment relief under the Class Order which allows responsible entities who issue ETFs quoted on the financial market operated by ASX Limited or Chi-X Australia Pty Ltd to restrict fund withdrawals to authorised participants only, and to provide index or portfolio information to authorised participants before other members.
The Class Order provisions relating to relevant interest and substantial holding relief and beneficial tracing have also been amended to provide that authorised participants do not have to be Australian residents for taxation purposes to rely on such relief and for the purpose of beneficial tracing.
There is no notification or application process for overseas market makers to rely on the Class Order.
If you have questions or require legal assistance in relation to the Australian ETF market, please get in touch with our expert Investment Funds team to discuss.
This insight was prepared with the assistance of Isham Sanjiv.