Holding counterparty risk at arm’s length

Exchange-traded funds have been as exposed to talk of counterparty risk as the next structured product, although the risk is lower. Under the European Union's Undertakings for Collective Investment in Transferable Securities III regulations, ETFs are subject to as much as 10% counterparty risk, a figure that can double if the delivery technique is derivative rather than physically based. Richard Jory reports

The easiest way to overcome counterparty risk concerns for exchange-traded products is to remind investors that it is limited to 10% under the European Union's Undertakings for Collective Investment in Transferable Securities III, or Ucits III. Providers of exchange-traded funds (ETFs) have done this, adjusting their marketing to boast of resets that kick in way below the statutory 10%. Newcomer Source - whose shareholders are Bank of America/Merrill Lynch, Goldman Sachs and Morgan Stanley -