bis working papers - bank for international settlements.pdfVIP

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 Ramaswamy† 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 fi