FIA EPTA has published a paper 'Exchange Traded Derivatives: Strengthening the Backbone of Sustainable Capital Markets; How ETDs can contribute to the transition towards green and sustainable capital markets'.
The paper highlights both the importance of ETDs and how the current EU framework disadvantages secondary markets, especially ETDs as they are not recognised for their important function in the transition.
The EU has taken a leadership role in creating a global baseline for regulatory initiatives to support the green transition, including the introduction of the Sustainable Finance Disclosure Regulation (SFDR). However, the SFDR currently unduly disincentivises the use of ETDs since any exposures to ETDs are not counted towards a taxonomy-alignment ratio.
This makes it more difficult for end-users to use ETDs for managing their financial risks and in the process undermines the goal of having safe, liquid, and efficient markets that can support the green transition.
ETDs are versatile financial instruments that can serve various purposes, including risk management and asset allocation. ETDs, crucially, help investors to hedge against risks such as climate-related events. With the ongoing assessment of the SFDR by the European Commission, it is time to reassess how ETDs are regarded.
Financial markets bring together market participants with different investment horizons and risk-return expectations. Fostering a harmonious and inclusive approach within the SFDR that recognises the unique value ETDs bring to capital markets can accelerate the transition to a more environmentally and socially responsible financial landscape.
Read the paper in full.
