Market Structures and Systemic Risks of Exchange-Traded Funds

17 Pages Posted: 7 Jun 2011

See all articles by Srichander Ramaswamy

Srichander Ramaswamy

Bank for International Settlements (BIS)

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

Ramaswamy, Srichander, Market Structures and Systemic Risks of Exchange-Traded Funds (April 1, 2011). BIS Working Paper No. 343, Available at SSRN: https://ssrn.com/abstract=1859246

Srichander Ramaswamy (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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