BlackRock, the company behind the iShares range of ETFs, has called for greater transparency and more consistent regulation of exchange-traded products. The call follows a run of negative press about ETFs, much of it coming after details emerged that the ‘rogue trader’ at UBS worked on their ETF desk.

While the UBS incident and associated losses were down to significant human failings and a lapse in internal risk controls, it has drawn much attention to exchange-traded products and the mechanics beneath their bonnet.

In particular, “synthetic” ETFs have come under the spotlight, receiving much of the scrutiny. This type of ETF delivers the performance of the underlying index, not by replicating the index by buying the underlying constituent securities, but by entering into a swap agreement with a counterparty.

This counterparty is usually an investment bank and, in some cases, is directly linked to the ETF provider itself, raising concerns about counterparty risk and conflicts of interest. Moreover, the collateral guaranteeing the swap may bear no resemblance to the underlying securities, prompting many to question the suitability of such structures in the event of a default by the swap counterparty.

These concerns, though valid, are not necessarily as bad as they sound. It should be noted that swap-based ETFs can offer many benefits, most notably reduced tracking error and lower costs. Furthermore, in many swap agreements the collateral underpinning the swap exceeds the exposure to the counterparty (so-called over-collateralisation) and may be of ‘higher’ quality (i.e. more liquid).

All this complexity, however, has confused investors, which is why BlackRock is urging for a return to full transparency with ETFs. “ETFs started out as transparent, liquid, simple, vehicles but some have gone to opacity. We need to get back to full transparency across all the range of ETF products” said the head of iShares Europe, Joseph Linhares, speaking to the Financial Times.

In a research paper linked to the call for greater transparency and regulation, BlackRock is recommending a set of global standards of transparency and disclosure be adopted by ETF issuers. These standards include: clear labelling of product structure and investment objectives; frequent and timely disclosure of all holdings and exposure; clear standards for diversifying counterparties and quality of collateral; disclosure of all fees and costs paid, including those to counterparties; and universal trade reporting for all equity trades, including ETFs.