SGX's ETF Market-Maker Rule Streamlining and Its Implications for Liquidity and Investor Returns

The Singapore Exchange (SGX) has embarked on a strategic overhaul of its ETF market-maker regulations, aiming to align with global standards while enhancing market efficiency. By streamlining requirements for designated market-makers (DMMs), SGX seeks to reduce administrative burdens and foster a more responsive ETF ecosystem. This reform, set to take effect on September 1, 2025, removes the obligation for DMMs to issue notifications when suspending or resuming bid/offer price quotations for ETFs. The move reflects a broader effort to bolster liquidity and investor confidence in Singapore’s equities market, particularly as the city-state competes with established hubs like the EU and US for ETF listings and trading activity [1].

Regulatory Efficiency and Global Alignment

SGX’s reforms mirror trends observed in mature markets, where regulatory simplicity has been linked to improved market functionality. For instance, the EU’s UCITS framework, while robust, has faced criticism for its fragmented liquidity landscape due to cross-exchange listings of ETFs. Studies show that UCITS ETFs often exhibit wider bid-ask spreads and lower trading volumes compared to their U.S. counterparts, partly due to the absence of consolidated tape systems [1]. By eliminating redundant administrative requirements, SGX aims to mitigate such inefficiencies, ensuring that DMMs can focus on core liquidity provision rather than compliance overhead.

The U.S. market, with its centralized structure and real-time transparency mechanisms (e.g., consolidated tape systems), offers a compelling benchmark. Research indicates that U.S. ETFs benefit from tighter spreads and higher trading volumes, driven by the seamless arbitrage between primary and secondary markets [3]. SGX’s reforms, by reducing operational friction, could help bridge the gap between emerging and mature markets, fostering a more dynamic trading environment.

Liquidity Implications: Lessons from the EU and US

The removal of notification requirements carries nuanced implications for liquidity. In the EU, empirical studies highlight that regulatory constraints on authorized participants (APs)—such as capital ratios—can weaken arbitrage activity during market stress, exacerbating liquidity distortions [2]. For example, during the 2020 “dash-for-cash” episode, ETFs linked to APs with lower capital ratios experienced pronounced declines in arbitrage intensity, leading to wider bid-ask spreads. This underscores the importance of balancing regulatory oversight with market flexibility.

In contrast, the U.S. market’s resilience during similar crises suggests that streamlined rules, when paired with robust arbitrage mechanisms, can sustain liquidity. However, the absence of consolidated liquidity visibility in the EU—where over-the-counter (OTC) trading dominates—poses a unique challenge. SGX’s reforms, by simplifying DMM obligations, may reduce transparency risks in fragmented markets, though careful monitoring will be essential to avoid unintended consequences [3].

Investor Returns and Market Stability

The interplay between regulatory changes and investor returns is equally critical. In the U.S., the proliferation of active ETFs and buffer ETFs since 2020 has demonstrated how regulatory adaptability can drive innovation and attract inflows. For instance, U.S.-listed fixed-income ETFs saw record inflows of over $100 billion in Q1 2025, partly driven by macroeconomic uncertainties and the appeal of liquid, transparent instruments [4]. SGX’s reforms, by enhancing market efficiency, could similarly incentivize institutional and retail investors to allocate capital to Singapore’s ETF ecosystem.

However, the EU’s experience with synthetic ETFs offers a cautionary tale. While these funds offer cost advantages, their reliance on derivatives introduces counterparty and liquidity risks, particularly during market shocks [2]. SGX’s focus on physical replication and robust DMM frameworks may mitigate such risks, ensuring that investor returns remain aligned with underlying asset performance.

Strategic Considerations for SGX

To maximize the benefits of its reforms, SGX must address potential trade-offs. For example, while reducing administrative requirements lowers costs for DMMs, it could also diminish transparency in secondary markets. This risk is amplified in markets without consolidated liquidity visibility, such as the EU. SGX’s consultation period, open until September 26, 2025, provides an opportunity to refine the framework, ensuring that liquidity remains resilient without compromising investor trust [1].

Moreover, the success of these reforms hinges on the broader regulatory environment. Singapore’s recent 20% tax rebate for primary ETF listings [1] complements the DMM changes, creating a holistic ecosystem that prioritizes both cost efficiency and market depth. By aligning with global best practices while tailoring solutions to local conditions, SGX can position itself as a competitive hub for ETF innovation.

Conclusion

SGX’s ETF market-maker rule streamlining represents a pivotal step in its journey to enhance regulatory efficiency and market responsiveness. By learning from the EU’s liquidity challenges and the U.S.’s centralized success, Singapore can craft a balanced framework that supports liquidity, attracts investor capital, and fosters long-term market stability. As the reforms take effect, the focus will shift to monitoring their real-world impact—particularly in volatile environments—to ensure that the benefits of streamlined regulations are fully realized without compromising the integrity of the ETF ecosystem.

Source:
[1] SGX RegCo streamlines ETF designated market-maker requirements [https://cbonds.com/news/3573539/]
[2] Authorized participants' regulatory constraints and limits to arbitrage [https://www.sciencedirect.com/science/article/pii/S0378426625001190]
[3] The European ETF Market: What can be done better? [https://www.ceps.eu/ceps-publications/european-etf-market-what-can-be-done-better/]
[4] Flow & Tell – Q1 2025 ETF/ETP Flows [https://www.ishares.com/us/insights/flow-and-tell-q1-2025]