BoE: synthetic ETFs are 鈥渙paque鈥�
19 July 2012 London
Image: Shutterstock
Synthetic exchange-traded funds (ETFs) are 鈥渙paque鈥�, according to the Bank of England鈥檚 June report on financial stability.
The BoE鈥檚 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鈥攐n top of synthetic ETFs鈥攃ollateral swaps, structured notes and bilateral term repos also 鈥渁ppear to be particularly opaque鈥�.
It added: 鈥淭hese opaque instruments may amplify stress within the financial system, by acting as drains on collateral or liquidity.鈥�
鈥淭he 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.鈥�
鈥淭he 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.鈥�
The BoE鈥檚 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鈥攐n top of synthetic ETFs鈥攃ollateral swaps, structured notes and bilateral term repos also 鈥渁ppear to be particularly opaque鈥�.
It added: 鈥淭hese opaque instruments may amplify stress within the financial system, by acting as drains on collateral or liquidity.鈥�
鈥淭he 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.鈥�
鈥淭he 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.鈥�
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