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| 11 December, 2017

Central Bank of Bahrain issues new rules on ETFs

The new directives will expand the categories of locally-domiciled mutual funds to include ETFs as another type of CIU

A car passes in front of the Central Bank of Bahrain in Manama, October 27, 2013.

A car passes in front of the Central Bank of Bahrain in Manama, October 27, 2013.

REUTERS/Hamad I Mohammed
Manama - New rules that recognise offshore and locally-domiciled exchange-traded funds (ETFs) have been issued by the Central Bank of Bahrain (CBB).

An announcement yesterday said the directives are a part of the a commitment to further enhance the collective investment undertakings (CIUs) in Bahrain under Volume 7 of CBB Rulebook.

The new directives will expand the categories of locally-domiciled mutual funds to include ETFs as another type of CIU that may establish in Bahrain and listed by banks and other financial institutions on licensed exchanges.

It will also permit the registration of listed offshore ETFs.

Moreover, the new directives recognise both conventional and Sharia-compliant ETFs, to accommodate for a wider range of investors’ preferences.

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ETFs are effectively funds that are traded like stocks on a stock exchange that mainly track index, a commodity, bonds or a basket of securities, and hence divide ownership of those assets into shares. ETF units can be bought or sold throughout the day on an exchange at a market-determined price.

The instruments have a number of features that retail and institutional investors are attracted to. Typically they provide price transparency, higher liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

Moreover, by owning an ETF, investors get the diversification of an index fund as well as the ability to easily trade the shares on the licensed exchanges.

“ETFs have grown substantially in international markets as one of the most successful financial innovations in recent years,” said CBB executive director for financial institutions supervision Abdul Rahman Al Baker.

“Introducing the new ETF directives in the kingdom will certainly attract local and foreign investments and further enhance the capital markets activity.”

Sico’s head of research Nishit Lakhotia told the GDN that, “ETFs as an investment vehicle have become immensely popular, especially over the five years from 2011 to 2016 where the assets managed by exchange traded funds globally have increased 2.5 times to $3.42 trillion by 2016-end.

“The phenomenal growth in ETFs has been mainly on the back of investor preferences and regulatory support.

“Accordingly, CBB’s issuance of regulatory framework for ETFs is the step in the right direction to capitalise on the growth in such tracker funds.

“It will not only provide investors with more options to invest but also a clear regulatory framework will encourage establishment of locally domiciled ETFs in Bahrain tracking different asset class,” he added.

Details of the new directives are available on the CBB website.

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