Financial Stability Board warns on ETFs
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The Financial Stability Board, made up of the world’s central banks and financial regulators, has expressed concern about the rapid growth and increasing complexity of the exchange traded fund market.
In a note published yesterday by the FSB, the board says regulatory and supervisory authorities need to be aware of a number of “disquieting developments” in the ETFs market that call for closer scrutiny.
The FSB is concerned that there has been an increase in product variety, with ETFs branching out to other asset classes such as fixed income, emerging markets and commodities, which are less transparent and less liquid.
In particular, the FSB has warned about the growth of synthetic ETFs, which use derivatives rather than physical securities.
It says as the firm holding the swap counterparty risk is usually acting as the ETF provider, problems at the banks active in swap-based ETFs may act as a “powerful source of contagion and systemic risk.”
The FSB says: “Market and banking supervisors and regulators are in the process of stepping up their monitoring of the ETF market.”
The board says that ETF providers and investors should review ETF risk management strategies.
It adds: “ETF providers should consider enhancing the level of transparency they offer to investors on the entire range of ETF products, especially the more complex ones.
“In particular, they should make publicly available detailed frequent information about product composition and risk characteristics, including on collateral baskets and arrangements for synthetic ETFs and securities lending, to enable investors to exercise their due diligence and promote a better understanding of the ETF market at large.”
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