Regulators’ concerns that exchange traded funds could present a potential threat to the stability of financial markets have been firmly rejected by Efama, the representative association for the European investment management industry.
In reply to a report criticising the ETF industry published in April by the Financial Stability Board, Efama said the existing Ucits regulatory framework governing ETFs in the European Union already contained “state of the art” risk management policies and procedures.
Efama noted that the public and media often confused ETFs with other exchange traded product structures that might not offer the same levels of investor protection.
Efama said the FSB and other regulators should be encouraged to carry out a comprehensive analysis of all exchange traded products (not just ETFs) to make “appropriate distinctions” among them.
Issues of concern highlighted by the FSB, the body that co-ordinates financial regulators, included potential conflicts of interest for investment banks working as ETF providers, the rapid growth in synthetic ETFs that use derivatives to track a benchmark, the use of collateral, and securities lending.
Efama said these areas of concern were managed and mitigated “to a large degree” within the existing Ucits framework. It also pointed out these issues were not unique to ETFs and were common across the financial services industry.
The FSB’s report also highlighted a potential conflict of interests where an investment bank could act as both a swap-based ETF provider and the swap counterparty. It said those investment banks most active in swap based ETFs could constitute a “powerful source of contagion and systemic risk”.
Efama’s response was to point out that, in the case of ETFs structured as Ucits, the same legal entity cannot act as both the ETF provider and the derivative counterparty, so that conflict of interests should not exist.
The FSB had also questioned if synthetic ETF providers could face liquidity risks in times of market stress. However, Efama noted that all Ucits managers were required to employ “appropriate liquidity risk management processes” to ensure their funds were able to meet any demands for redemptions from investors.
Source: http://www.ft.com
In reply to a report criticising the ETF industry published in April by the Financial Stability Board, Efama said the existing Ucits regulatory framework governing ETFs in the European Union already contained “state of the art” risk management policies and procedures.
Efama noted that the public and media often confused ETFs with other exchange traded product structures that might not offer the same levels of investor protection.
Efama said the FSB and other regulators should be encouraged to carry out a comprehensive analysis of all exchange traded products (not just ETFs) to make “appropriate distinctions” among them.
Issues of concern highlighted by the FSB, the body that co-ordinates financial regulators, included potential conflicts of interest for investment banks working as ETF providers, the rapid growth in synthetic ETFs that use derivatives to track a benchmark, the use of collateral, and securities lending.
Efama said these areas of concern were managed and mitigated “to a large degree” within the existing Ucits framework. It also pointed out these issues were not unique to ETFs and were common across the financial services industry.
The FSB’s report also highlighted a potential conflict of interests where an investment bank could act as both a swap-based ETF provider and the swap counterparty. It said those investment banks most active in swap based ETFs could constitute a “powerful source of contagion and systemic risk”.
Efama’s response was to point out that, in the case of ETFs structured as Ucits, the same legal entity cannot act as both the ETF provider and the derivative counterparty, so that conflict of interests should not exist.
The FSB had also questioned if synthetic ETF providers could face liquidity risks in times of market stress. However, Efama noted that all Ucits managers were required to employ “appropriate liquidity risk management processes” to ensure their funds were able to meet any demands for redemptions from investors.
Source: http://www.ft.com
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