Exchange Traded Funds Monitor Call

The Bank of England's new Financial Policy Committee (FPC) has just released its first Financial Stability Report.

According to Mervyn King, the Governor of the Bank of England, the Financial Services Authority (FSA) should monitor the sale of Exchange Traded Funds (ETFs) more closely.  The main issue raised was that ETFs can contain complex and opaque funding structures that could disguise the actual risk pertaining to the investment.

Mr King said: “For good and proper reasons, these funds have grown rapidly in recent years, with the size of the European ETF market now estimated to exceed $300bn.  But complexity has begun to creep in, especially through so-called synthetic ETFs and the assets of ETFs are increasingly being used as a source of funding for some banks, through collateral swaps and similar transactions.  The Committee advises the FSA that its bank supervisors should monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by ETFs."

As a separate part of the report the FPC urged banks to divert profits away from dividends and bonuses and towards building up capital reserves to bolster them against future losses.