Systemic risk implications of ETFs and impact of ETFs on their underlying markets

Although exchange traded fund (ETF) trading is unlikely to threaten financial stability, OTC derivatives and securities lending operations do have relevance for systemic risk assessment, says research.


In terms of exchange traded funds (ETFs), systemic risk refers to the possibility of an ETF-specific crisis spilling over to the wider financial system. A few key concerns have been voiced. One is based on the assumption that parties to collateralised transactions post hard-to-fund illiquid assets as collateral and that massive ETF redemptions could cause a funding liquidity shock to these swap or securities lending counterparties (FSB, 2011 and BIS, 2011a).

Another concern centres on whether the

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