Draft:Exchange Traded Instruments

An Exchange-Traded Instrument (ETI) is a sub-category of Exchange Traded Products (ETP) that encompass a range of structured securities designed to deliver returns based on various underlying assets, strategies, or derivatives. Unlike Exchange-Traded Funds (ETFs), which typically follow specific regulatory frameworks (such as the Investment Company Act of 1940 in the USA and Directive 2009/65/EC, "UCITS" in the EU), ETIs are often issued under the Prospectus Directive or similar frameworks, particularly in Europe.

Definition and Characteristics

ETIs are listed securities that offer exposure to underlying assets or strategies and trade throughout the day on regulated exchanges. They can replicate customized indices, employ actively managed strategies, or use derivatives to provide specific risk/return profiles. ETIs are commonly used to structure investment products that fall outside the scope of traditional fund regulations, particularly in jurisdictions like the European Union, Switzerland, the United Kingdom, Hong Kong, Singapore and the United Arab Emirates.

Advantages

• Access to Complex Strategies: ETIs provide investors with access to sophisticated investment strategies, such as leveraged or inverse exposure, that are not easily replicated through traditional investment vehicles like mutual funds or standard ETFs. • Flexibility: Their structural features allow for highly customized risk/reward profiles, catering to specific investment objectives. • Trading Flexibility: Like other ETPs, ETIs trade on national stock exchanges throughout the day, allowing for intraday trading and the use of advanced order types like limit and stop orders. Disadvantages and Risks • Complexity: The embedded structural features and non-linear return profiles of ETIs can make them more complex and potentially harder for investors to understand compared to traditional ETFs. • Market and Structural Risks: They can carry greater embedded market and structural risks, as demonstrated by events such as significant declines in inverse ETPs during periods of high market volatility. • Issuer Solvency Risk: As debt securities, some ETIs depend on the issuer's solvency to deliver fully on expectations. Although the majority of ETIs listed are fully-collateralized there are still some issuances with exposure to the Issuers Solvency what makes those ETIs even more complex • Tracking Performance: While designed to deliver specific returns, the complexity can sometimes lead to performance that differs significantly from investor expectations, especially in volatile markets.

Regulatory Framework

Unlike ETFs, ETIs are typically not subject to the EU UCITS Directive or the US Investment Company Act. Instead, they are issued as derivative securities under prospectus regulations such as the EU Prospectus Regulation (2017/1129), with regulatory supervision by local financial authorities. This provides issuers with structural flexibility but also requires investors to conduct careful due diligence. There have been calls for more consistent identification and categorization of ETPs, including ETIs, by exchanges and market participants. Regulators have also highlighted the need for additional disclosure and investor education regarding complex products like leveraged ETPs (which fall under the ETI classification) due to their potential for unanticipated performance in volatile conditions.

Types of ETIs

ETIs may include: - Actively Managed Certificates (AMCs) - Notes tracking a customized index established for the issuance - Thematic exposure instruments - Bespoke derivative-linked certificates - Trackers of Crypto Currencies including actively managed crypto portfolios - Trackers of collective investment schemes

Key Issuers of ETIs

Notable European issuers of ETIs include: Boost ETP: Explicitly issues short (inverse) and leveraged exchange-traded products, including 3X equity and commodity products in the EU and UK

Deutsche Bank: Issues mainly Xtrackers ETFs and manages PowerShares DB commodity and currency-based ETCs, but has also issued ETIs, specifically those exposed to leverage. Deutsche Bank offers ETIs mainly in the EU and switzerland

iMaps ETI: Offers under the trade name iMaps Capital Markets a broad range of Actively Managed Certificates (AMCs), Fund-Linked Notes and Crypto Currency Certificates listed on EUWAX Stuttgart in Germany and other exchanges in the EU. iMaps offers ETIs in the EU countries, Switzerland, UK, Hong Kong, Singapore and the United Arab Emirates.

Lang & Schwarz: issued leveraged ETIs as well as wikifolio certificates, which are partly-collateralized notes linked to customized indices and fall under the ETI definition. Lang & Schwarz is active in the german speaking countries Germany, Switzerland and Austria only

Leonteq Securities: Offers structured investment solutions including ETIs in the EU, UK, Switzerland, Hong Kong and Singapore UBS: Offers a diverse array of structured ETIs for institutional and retail investors with listings at EUWAX Stuttgart in Germany and offers the units in the EU, UK, Switzerland, and most Asian juristicions

Vontobel Financial Products: Part of Vontobel Bank Group and well-known for its derivatives and exchange-listed instruments. Listings in several major European financial centers including EUWAX Stuttgart in Germany and offers in the EU, Switzerland, UK, Hong Kong and Singapore

21Shares: An issuer of cryptocurrency ETPs, including those with "Short Bitcoin" exposure, which align with the ETI definition of inverse returns. He regional focus is within the EU, Switzerland and UK.

Market Position and Use Cases

ETIs are widely used in Europe (EU countries, Switzerland and United Kingdom) to provide exposure to non-UCITS compliant strategies, alternative investments, and tailor-made portfolios. They are becoming more popular in the main Asian international financial centers Singpore, Hong Kong and Dubai/UAE since the swiss and Liechtenstein based European ETI Issuers entered the market there in the late 2010s. They offer a bridge between full fund structures and simple notes, making them attractive for institutional and high-net-worth clients seeking customized investment solutions on regulated exchanges.