BoE: synthetic ETFs are “opaque”
19 July 2012 London
Image: Shutterstock
Synthetic exchange-traded funds (ETFs) are “opaque”, according to the Bank of England’s June report on financial stability.
The BoE’s report is produced twice a year. It provides an assessment of the stability of the financial system, and advises on policy actions to reduce and mitigate risks to stability.
The report said that—on top of synthetic ETFs—collateral swaps, structured notes and bilateral term repos also “appear to be particularly opaque”.
It added: “These opaque instruments may amplify stress within the financial system, by acting as drains on collateral or liquidity.”
“The risks due to opacity are higher for instruments that have complex structures and where little meaningful information is available. The most complex funding structures include those where credit risk assessment requires models and counterparty stress testing, liquidity risk assessment requires behavioural modelling and risk assessments are blurred by many layers of interconnections.”
“The funding structures with the least meaningful information include those where disclosure is poor, third-party scrutiny is unavailable or partial and historical experience is limited.”
The BoE’s report is produced twice a year. It provides an assessment of the stability of the financial system, and advises on policy actions to reduce and mitigate risks to stability.
The report said that—on top of synthetic ETFs—collateral swaps, structured notes and bilateral term repos also “appear to be particularly opaque”.
It added: “These opaque instruments may amplify stress within the financial system, by acting as drains on collateral or liquidity.”
“The risks due to opacity are higher for instruments that have complex structures and where little meaningful information is available. The most complex funding structures include those where credit risk assessment requires models and counterparty stress testing, liquidity risk assessment requires behavioural modelling and risk assessments are blurred by many layers of interconnections.”
“The funding structures with the least meaningful information include those where disclosure is poor, third-party scrutiny is unavailable or partial and historical experience is limited.”
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