Shadow Banking and ETFs: Is There a Connection?

March 26th at 7:00am by Tom Lydon

Exchange traded funds are in focus in the European Union as regulation is clamping down upon any tools that could cause stress within the financial system. Are ETFs considered a “conflict of interest” for the financial system overseas?

“We’ve seen a dramatic rise in the role of ETFs in recent years and of course this causes regulators’ warning bells to start ringing,” Richard Reid, research director for the London- based International Centre for Financial Regulation, said. Still, such funds can “provide investors with much needed access to financial markets,” he said. [What Regulators are Looking at in ETFs]

The European Commission is examining “potential conflicts of interest” that may affect ETFs, reports Jim Brunsden for Bloomberg. The regulation of derivatives trades, use of ETFs and re-purchase agreements are under scrutiny to analyze whether they evade following the rules or create excess risk. [BlackRock CEO Says ETFs Proliferating on Global Scale]

According to The Financial Stability Board, ETFs may exacerbate new types of risks due to their transparency and structure. The European market for ETFs is small in comparison to the U.S. [Banks Want ETF Pass on Vlocker Rule: Report]

The commission is looking into stricter rules regarding collateral that banks and ETF providers have to use for derivatives trades, and how to address conflicts of interest that arise when the bank that manages an ETF is also the fund’s counterparty on a derivatives trade, reports Brunsden.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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