Exchange-Traded Funds (ETFs) and Systemic Risk

22 Pages Posted: 19 May 2020

See all articles by Sebastian Grund

Sebastian Grund

International Monetary Fund (IMF) - Legal Department

Date Written: April 22, 2020

Abstract

This essay focuses the factors that make ETFs and trading in them unique – at times uniquely risky. Following a deep dive into the microstructure of ETFs, I zoom in on the potential systemic risks associated with ETFs, with a focus on the legal structure and, in particular, the arbitrage channel. Drawing on insights from the literature, this essay posits that the microstructure underlying the arbitrage mechanism inherent to ETFs, rather than the more conventional channel of massive demand redemption alone, can pose systemic risk. Specifically, I argue that the close relationship between the participants involved the management and trading of ETFs, which tend to be global systemically-important banks (G-SIBs), means that stress in the ETF markets can easily spill over into the broader financial system.

Keywords: ETF; fund management; financial regulation; systemic risk; interconnectedness

Suggested Citation

Grund, Sebastian, Exchange-Traded Funds (ETFs) and Systemic Risk (April 22, 2020). Available at SSRN: https://ssrn.com/abstract=3583028 or http://dx.doi.org/10.2139/ssrn.3583028

Sebastian Grund (Contact Author)

International Monetary Fund (IMF) - Legal Department ( email )

700 19th St NW
Washington, DC 20431
United States

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