In May 2008, the International Swaps and Derivatives Association, Inc. (ISDA) formed a working group to produce standard provisions for equity derivative transactions referencing exchange traded funds (ETFs). This working group is made up of ISDA staff members, lawyers and derivative experts from dealers, banks and ETF manufacturers. Carol Derk, a senior partner of BLG in the Investment Management Group, is the only Canadian member of the working group.
It is expected that the annex produced by the working group will be global in nature and will apply to any derivative where the underlying interest is an ETF, irrespective of where that ETF is listed. However, as actively-managed ETFs have been introduced into the marketplace relatively recently, it was decided that this project would not try to include provisions that might be necessary to deal with actively-managed ETFs.
The group is using some of the concepts employed in the 2006 ISDA Fund Derivatives Definitions to address some of the similarities between ETFs and other investment funds. The group is currently considering a number of issues that relate specifically to derivatives on ETFs, including appropriate adjustment, disruption and termination events, how to address declines in the net asset value of the ETF, how to deal with a failure to report the net asset value of the ETF on any business day and how to address events that may effect the index that is tracked by the ETF.
The timing of the completion and publication of the ETF annex has not yet been determined.