EFAMA highlights liquidity and counterparty risks in ETFs
15 July 2019 Brussels
Image: Shutterstock
The European Fund and Asset Management Association (EFAMA) has finalised its comment paper concerning liquidity and counterparty risks in exchange-traded funds (ETFs).
In terms of liquidity risks, the investment management firm emphasised the importance of considering the depth of secondary markets, which are critical to ETFs compared to traditional mutual funds because they allow investors to continue to redeem their shares, and allow dealers to trade underlying securities, in the event of “sudden market shocks”.
For counterparty risks, EFAMA recommends the utilisation of multi-swap counterparty platforms, describing this as an “industry best practice” for swap-based ETFs.
To further mitigate counterparty risks, EFAMA highlights the transparency of the Securities Financing Transaction Regulation and the second Markets in Financial Instruments Directive regimes as an “additional guarantee”.
Overall, EFAMA advises a “thematic review of the ETF ecosystem”, as according to the International Organization of Securities Commission, which involves the formation of a classification system between ETFs and exchange-traded products (ETPs).
In terms of liquidity risks, the investment management firm emphasised the importance of considering the depth of secondary markets, which are critical to ETFs compared to traditional mutual funds because they allow investors to continue to redeem their shares, and allow dealers to trade underlying securities, in the event of “sudden market shocks”.
For counterparty risks, EFAMA recommends the utilisation of multi-swap counterparty platforms, describing this as an “industry best practice” for swap-based ETFs.
To further mitigate counterparty risks, EFAMA highlights the transparency of the Securities Financing Transaction Regulation and the second Markets in Financial Instruments Directive regimes as an “additional guarantee”.
Overall, EFAMA advises a “thematic review of the ETF ecosystem”, as according to the International Organization of Securities Commission, which involves the formation of a classification system between ETFs and exchange-traded products (ETPs).
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