FSB Warns Over ETFs Risk

Systematic risk could be created if banks active in derivative-based “synthetic” exchange-traded funds face problems, warned the Financial Stability Board.

Systematic risk could be created if banks active in derivative-based “synthetic” exchange-traded funds face problems, warned the Financial Stability Board (FSB), Financial Times reports. The board is concerned that conflicts of interest could arise due to the dual role of some investment banks as both providers of synthetic ETFs and counterparties to the derivatives used by the ETFs. FSB, the body which co-ordinates financial regulators, urged ETF providers and investors to review their ETF risk management strategies in areas, such as counterparty risk and collateral management. It said ETF providers must consider increasing transparency for all ETFs, especially for more complex products.

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