EFAMA dismisses concerns over ETF liquidity and counterparty risk

Jul 17th, 2019 | By | Category: ETF and Index News

The European Fund and Asset Management Association (EFAMA) has dismissed concerns voiced by the European Central Bank’s semi-annual Financial Stability Review last year relating to potential liquidity and counterparty risks in ETFs, labelling the concerns as ‘misplaced’.

EFAMA dismisses concerns over ETF liquidity and counterparty risk

EFAMA has dismissed concerns voiced by the European Central Bank last year regarding liquidity and counterparty risks in ETFs.

The Brussells-headquartered investment industry association points to how ETFs have fared well during bouts of significant volatility, adding that the ‘often overlooked’ indicator of ETF liquidity – the depth of the secondary market – provides them with an extra level of resilience compared to mutual funds.

According to EFAMA, evidence confirms that, for both equity and fixed income ETFs, the secondary market has largely “cushioned” the impact of sudden market shocks without affecting investors’ ability to redeem shares nor that of dealers (authorised participants) to trade the underlying securities.

The association further notes that recent MiFID II reforms are contributing to progressively greater price transparency and to deeper pools of secondary market liquidity to the benefit of ETF end-users.

Turning to regulators’ concerns around counterparty risks, EFAMA illustrates the use of multi-swap counterparty platforms as an industry best practice for providers of synthetic (or swap-based) ETFs, as well as the rigorous selection procedures ETF providers carry out when choosing an eligible counterparty.

EFAMA also highlighted the strict collateral rules under the UCITS and EMIR (margining) regimes as an additional guarantee against the systemic contagion channels often assumed.

In conclusion, EFAMA stressed the need for a proper classification system that clearly distinguishes between ETFs (which, in Europe, are essentially UCITS-licensed products) and other ETPs.

EFAMA argues that such a scheme would help investors more readily assess the risks inherent to each type of ETP, as well as aid regulators to better focus their efforts at protecting investors and guarding financial stability.

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