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ETFs in the dock over their potential threat to financial stability

11 August 2011

Exchange-traded funds have been targeted by authorities on both sides of the Atlantic for their supposed potential to introduce systematic risk into markets. Alastair O’Dell considers the evidence

Read more: ETF ESMA SEC BoE contagion

Financial authorities around the world have understandably been operating at a heightened state of vigilance for any instrument that could potentially cause the next crisis. Governments, central banks and regulators are accused of presiding over a long period of time where imbalances built up in the system, ultimately leading to it crashing down. They are determined to not get caught-out again.

The Bank of England (BoE), for example, set out typical thinking in its Financial Stability Report in June. “The emergence of new and complex financial instruments, especially if not supported by suitable developments in market infrastructure, can also entail risks. For example, the recent crisis was preceded by a gross underestimation of the risks posed by complex structured credit products and the resulting network of intra-financial system exposures. This contributed to the scale and breadth of the crisis.”

Across the major markets new institutions have been...

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