An Authorized Participant (AP) wishes to create new units of an ETF that tracks the S&P/TSX 60 Index. The ETF typically requires a creation basket consisting of all 60 underlying stocks in their proportional weightings. Suppose the AP delivers the required basket, but one of the underlying stocks, with a current market value of $50,000, has temporarily halted trading due to a news announcement. How might this situation impact the creation process or the AP's consideration?

Question: An Authorized Participant (AP) wishes to create new units of an ETF that tracks the S&P/TSX 60 Index. The ETF typically requires a creation basket consisting of all 60 underlying stocks in their proportional weightings. Suppose the AP delivers the required basket, but one of the underlying stocks, with a current market value of $50,000, has temporarily halted trading due to a news announcement. How might this situation impact the creation process or the AP's consideration?

Answer options:

• The ETF issuer will reject the creation request until all underlying stocks in the basket are actively trading.
• The AP must provide additional cash equal to the value of the halted stock to complete the creation unit transaction. ✅ The ETF issuer may accept the creation, but the value of the halted stock in the basket will be calculated based on the previous day's closing price, potentially leading to a cash adjustment.
• The AP will be forced to substitute the halted stock with a highly liquid alternative agreed upon with the ETF issuer.

Correct answer: The ETF issuer may accept the creation, but the value of the halted stock in the basket will be calculated based on the previous day's closing price, potentially leading to a cash adjustment.

Explanation: In ETF creation/redemption, if a security in the basket is not readily tradable or priced, cash components or prior day's closing prices with cash adjustments are often used for settlement to ensure the transaction can proceed without unreasonable delay.