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EFAMA: ETFs risks 'misplaced'


The ECB had warned on ETF liquidity risks

The ECB had warned on ETF liquidity risks

Regulators should implement a “classification system” to distinguish between exchange-traded funds (ETFs) and other exchange-traded products (ETPs) rather than focusing on “misplaced” fears over liquidity and counterparty risks, an industry body has claimed.

The European Fund and Asset Management Association (EFAMA) said investors require “a clearer distinction” between ETFs – which, in Europe, it says, are “essentially UCITS-licensed products” – and other ETPs in order to assess the risks inherent in each vehicle.

The body suggested introducing a classification system, which would “help investors more readily assess the risks inherent to each type of ETP, as well as aid regulators to better focus their efforts at protecting investors and guarding financial stability”.

Currently, regulators and the European Central Bank (ECB) are assessing both liquidity and counterparty risk concerning ETFs and the systemic risk they could pose. But EFAMA said a focus on these factors was “misplaced”.

The ECB’s semi-annual Financial Stability Review, released in November, warned market “disruptions” that lead to significant redemption pressures across ETFs – and knock-on effects to related markets – could pose a risk to financial stability.

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However, in a statement released on Monday, EFAMA said the secondary market for ETFs was “a key, but often overlooked, indicator to appreciate the resilience of ETF liquidity”.

“This [secondary market] acts as an additional layer of liquidity when compared to ordinary mutual funds,” it said.

“Evidence confirms that both for equity and fixed income ETFs, the secondary market has largely cushioned the impact of sudden market shocks, without affecting investors’ ability to redeem their shares, nor that of dealers to trade the underlying securities.”

Counterparty risk

The ECB also warned on the potential for counterparty risk within synthetic ETFs, which use derivatives or engage in securities lending. It said investors in products such as these carried the risk of loss from a default of the counterparty.

But EFAMA said the usage of multi-swap counterparty platforms as an industry ‘best practice’ for providers of synthetic ETFs should mitigate this risk.

 

 



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