TAILIEUCHUNG - Market structures and systemic risks of exchange-traded funds

The authorities have also led some policy initiatives to encourage investors to adopt new references moving away from short-term indexation. For example, the main securities exchange (BM&F Bovespa) introduced reference rates for 3 and 6 months aiming at extending the reference rate for investors. In February 2012, the National Treasury undertook securities exchange operations with Extramercado Funds5 in order to adjust their portfolio. The investment policy of these funds has been adjusted such that they must be referenced to one of the Anbima Market Indices (IMA). The exchange operations resulted in a redemption of R$ 61 billion in securities linked. | BIS Working Papers No 343 Market structures and systemic risks of exchange-traded funds by Srichander Ramaswamy Monetary and Economic Department April 2011 JEL classification G24 G28 G32 Keywords Mutual funds total return swaps securities lending systemic risk BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements and from time to time by other economists and are published by the Bank. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from Bank for International Settlements Communications CH-4002 Basel Switzerland E-mail publications@ Fax 41 61 280 9100 and 41 61 280 8100 This publication is available on the BIS website . Bank for International Settlements 2011. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 print ISBN 1682-7678 online Market structures and systemic risks of exchange-traded funds Srichander Ramaswamy1 Abstract Crisis experience has shown that as the financial intermediation chain lengthens it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds which have become popular among investors seeking exposure to a diversified portfolio of assets share this characteristic especially when their returns are replicated using derivative products. As the volume of such products grows such replication strategies can lead to a build-up of systemic risks in the financial system. This article examines the operational frameworks of exchange-traded funds and identifies potential channels through which risks to financial stability can materialise. JEL classification G24 G28 G32. Key words Mutual funds total return swaps securities lending systemic risk. 1 The author thanks Stephen Cecchetti Matthew

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