Individual Investors


What new DDO regulations mean for ETFs


Regulations on asset managers and financial advisers have increased in number and scope over the past 10 years. Much of which has been for the better.

New Design and Distribution Obligations (DDO) came into effect on 5 October 2021 and will change how many types of financial products, including ETFs, can be sold. Under the regulations, ETF Securities is both a product issuer (a company that builds funds) and a distributor (a company that sells funds). We understand our obligations under the new regulations. Which include the below.

What is DDO?

Put simply, it tries to make sure that fund managers are creating funds that are “fit for purpose” and built with investors’ interests in mind. It also tries to ensure that companies selling or recommending funds – including financial advisers, stockbrokers and wrap platforms – are accurately presenting them to investors.

DDO covers many types of financial products—not just funds. It also covers credit cards, insurance, superannuation, home loans—and more. It was brought into being thanks to both the 2014 Financial System Inquiry and the Hayne Royal Commission. Both found that some financial products had been badly built and sold.

DDO aims to give all investors more clarity on what financial products do and what the risks are. It does this by requiring fund managers to:

  • Maintain a target market determination (TMD, discussed below) for every fund; and

  • Ensure that funds are sold into their target market and nowhere else.

Additionally, DDO puts requirements on product distributors as well. These include:

  • Ensuring every fund distributed has a TMD;

  • Following the reporting requirements in the TMD;

  • Keep a register of complaints, even when there are none;

  • Ensure any fund is sold in line with the TMD.

What is a target market determination (TMD)?

Assessing funds and deciding if they are appropriate for investors is something fund managers, brokers and advisers do every day.

What is new is DDOs shifting the onus onto fund managers to ensure that financial instruments are built with investors in mind. Some investors have different interests and needs than others. Hence, ASIC has required fund managers to publicly declare who the target market is and how the product meets their needs. This declaration is called a target market determination, or TMD.

Making a TMD requires fund managers to look at their funds’ investment objectives, investment strategies, use cases, time horizons, risk profiles and other criteria. On this basis determine which markets they are most suited to and whether they are appropriate for particular types of retail investors.

It is believed that many fund managers will use a “traffic light” approach of green, orange and red so that advisers, brokers and platforms can more quickly assess if investors are within (green), potentially within (orange) or outside (red) the target market.

Complaints monitoring

Well-managed businesses always keep an eye on complaints. However, DDO raises the stakes and requires advisers and brokers to report complaints about funds directly to the fund manager—and in writing.

How DDO impacts you

In keeping with our obligations, ETF Securities has developed TMDs for all our products. For investors wishing to view them, they are available in the link below.

For our investors, there will be no direct impact on the portfolio management of our funds because of DDO. DDO will neither change nor impact fund performance. However, we hope that the regulations will provide greater clarity and insight into the risks and potential rewards of our funds. We also hope that they will allow investors to make better-informed decisions about what ETFs are right for them.