In Europe’s two largest ETF hubs, Luxembourg and Ireland, different rules govern the naming of Exchange Traded Funds (ETFs). While European rules for ETF naming conventions are determined by Paris-based authority ESMA, the implementation by national supervisors CSSF in Luxembourg and CBI in Ireland diverges, presenting both opportunities and risks for ETF providers.
Despite Ireland’s dominance as the largest European domicile for ETFs, Luxembourg is said to gain favour as a preferred destination for launching actively managed ETFs, not only thanks to its existing robust mutual fund infrastructure.
“Managers have so far been more comfortable with the naming convention in Luxembourg,” said Andrew Craswell, head of relationship management at Brown Brothers Harriman.
Regulatory frameworks and naming conventions play a crucial role in shaping investor decisions, fund creation, and cross-border distribution within the ETF market. However, the existence of different naming conventions has the potential to confuse investors, as it implies the presence of ETF-labelled products that lack essential characteristics like regular intraday pricing.
The divergence in naming conventions exemplifies the complexity and evolution of the financial services industry, highlighting an area of scrutiny for investors, asset managers, and industry stakeholders. For fund issuers, it calls for careful consideration of operational, commercial, and tax factors when choosing the optimal market entry strategy.
Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), has fully integrated ESMA’s ETF guidelines into its national regulations. CSSF focuses on applying the “UCITS ETF” identifier at the share class level when a fund comprises both ETF and non-ETF share classes. This approach contrasts with that of the Central Bank of Ireland (CBI), which enforces ESMA’s mandate for the identifier’s use at the fund level.
CSSF looks at share class, CBI at fund name
“CSSF takes the view that in the particular case of a (sub-)fund encompassing both ETF and non-ETF share classes, the identifier should be used in the name of the share class (and not in the name of the fund or sub-fund) in order to clearly differentiate towards investors between ETF and non-ETF share classes,” CSSF told Investment Officer.
This approach clashes with that of the Central Bank of Ireland (CBI), which is enforcing ESMA’s guidelines that mandate the use of the “UCITS ETF” identifier at the fund level.
ESMA nevertheless sticks to its guns. “The rules you refer to date from 2012, and there is no plan to change them,” said a spokesman, adding that similar rules apply also in non-EU markets and are on the agenda at IOSCO level.
While ESMA’s guidelines provide a blueprint for the naming conventions of ETFs, the diverging interpretations by Luxembourg and Ireland exemplify the complexity and evolving nature of the financial services industry. As such, it’s an area that investors, asset managers, and industry stakeholders will want to watch closely in the future.
Confusing for investors
Paul Heffernan, CEO of Waystone ETF, a Dublin-based firm also active in Luxembourg, said this divergence in approach can cause confusion, even though he believes that Ireland has correctly interpreted the EU rules. Share classes with “ETF” in their name, nevertheless, are not necessarily ETFs, leading to misunderstanding among investors and industry stakeholders, he said. He stresses the need for the industry to carefully consider operational, commercial, and tax factors before choosing the best market entry strategy.
“The naming convention point causes some confusion,” said Heffernan. “There are share classes with ETFs in their name that are not ETFs. That’s confusing for the industry and is particularly confusing for investors.”
Brown Brothers Harriman’s Craswell noted that the flexible interpretation of the naming rules by CSSF has already prompted several asset managers to launch combined ETF and mutual fund share class products in Luxembourg. Having the right operational infrastructure that can support the complexities of the operating model remains a key concern, he said.
‘ESMA needs to change its guidance’
Sergey Dolomanov, a partner at law firm William Fry, argues that under the current regulatory framework, it is unclear how Luxembourg fund managers are able to only use the “UCITS ETF” label at the share class level. He suggests that the rule forcing the “UCITS ETF” label to be applied at the fund level should be revised by ESMA to only require its use at the level of the ETF share class.
“It would, of course, be helpful if the rule forcing the ‘UCITS ETF’ label to be applied at the fund level was revised to only require its use at the level of the ETF share class,” Dolomanov said. “This should be done by ESMA, and in the meantime, to the extent the existing rules are not fully adapted/enforced by the national competent authorities, that should be disclosed.”
Compelling case for change
There is a compelling case for change. In April, HSBC Asset Management announced ETF share classes for four of its existing Ireland-based bond index funds. Before launching the ETF share classes, HSBC changed the names of four index funds to include ‘UCITS ETF’ in their names as per the ESMA rules. The name of the HSBC Global Government Bond Index was changed to Global Government Bond UCITS ETF, for example.
Until HSBC changed its fund names, the divergence in the application of naming conventions by Ireland and Luxembourg had not seen a significant level of scrutiny. As fund managers experiment with new structures, it’s becoming an increasingly important issue.
“The issuing of the new share classes will meet growing investor demand for flexibility, by offering listed and unlisted share classes through a single fund in a move designed to increase investor choice,” said HSBC in April. The bank’s ETF team did not wish to comment for this article.
“Certain asset managers will be comfortable with the naming convention for certain strategies and investor types,” said BBH’s Craswell. “The structure allows asset managers to drive further scale in their products, and investors benefit from a greater choice of access channels for a particular strategy. Interest is clearly growing in the structure, and regulators will take these products through the approach process set forth in the regulatory framework.”
In Luxembourg, Geoffroy Hermanns, partner at law firm Norton Rose Fulbright, noted that many ETFs today are not purely passive ETFs anymore “but can rather be considered as hybrids, in which amendments can be made to the relevant index that is tracked in certain specific market turbulences.”
Active ETFs still rare in Luxembourg
Real active ETFs – those not following a particular index – are still quite rare in Luxembourg, Hermanns said, with the first one having been established only in 2021. “I, however, do not think that the regulatory approach in Luxembourg is more flexible than in Ireland. The CBI – as the CSSF – has proven to be a very approachable, proactive, and enabling regulator with respect to funds.”
With the prominent presence of actively managed UCITS funds, Luxembourg has developed an “entire ecosystem being perfectly geared towards this type of products,” Hermanns said. “That includes, of course, the management companies, custodians, fund administrators, law firms, and auditors, but also, and maybe more importantly for this discussion, the regulator (CSSF) itself, with personnel that is used to handle these types of products and with a better understanding of these.”
One point, however, that will still put Ireland ahead of Luxembourg for these structures is the Ireland-US tax treaty that applies to ETFs that have significant exposure to the US markets. Although some believe Luxembourg may be better placed for actively managed ETFs, the treaty gives US investors a 15% advantage on withholding tax, an offer hard to beat by other jurisdictions like Luxembourg.
The debate around ETF naming conventions ultimately ties into the broader landscape of the European ETF market and its growth prospects. Luxembourg, as the largest European centre for mutual funds, and Ireland, the largest hub for ETFs, both have a role to play. As long as national regulators like CBI and CSSF decide to apply EU-level conventions in different ways, fund and ETF managers looking to innovate their products will have to consider these differentials. For clients, especially those looking at both Irish- and Luxembourg-domiciled funds, the absence of a harmonious regulatory approach across Europe could point to ongoing confusion.