Market Structures and Systemic Risks of Exchange-Traded Funds
17 Pages Posted: 7 Jun 2011
Date Written: April 1, 2011
Abstract
Crisis experience has shown that as the financial intermediation chain lengthens, it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds, which have become popular among investors seeking exposure to a diversified portfolio of assets, share this characteristic, especially when their returns are replicated using derivative products. As the volume of such products grows, such replication strategies can lead to a build-up of systemic risks in the financial system. This article examines the operational frameworks of exchange-traded funds and identifies potential channels through which risks to financial stability can materialise.
Keywords: Mutual funds, total return swaps, securities lending, systemic risk
JEL Classification: G24, G28, G32
Suggested Citation: Suggested Citation