iShares says some ETF providers are not transparent enough about risks

THE world’s biggest provider of exchange-traded funds (ETF) BlackRock’s iShares admitted yesterday that the ETF market needs to address issues with transparency and “potential conflicts of interest” but said that “some firms are more transparent and clear than others”.

The firm was responding to a report by the Financial Stability Board (FSB), an international regulatory body affiliated with the Bank of International Settlements, which said increasing complexity and the growth of ETFs tracking illiquid asset classes and using derivatives were concerning.

iShares’ Joe Linhares said: “iShares has always been transparent about the revenues generated and the risk framework surrounding the activity.”

The FSB said that ETF investors, who are often pension funds or unsophisticated retail investors, could be exposed to risks they are not aware of, particularly in swap-based ETFs: “Since the swap counterparty is typically the bank also acting as ETF provider, investors may be exposed if the bank defaults,” it said. “Problems at those banks that are most active in swap-based ETFs may constitute a powerful source of contagion and systemic risk.”

Meanwhile, the Financial Services Authority issued a rebuke to the European Commission for its proposed regulations of high frequency trading, claiming they will be too difficult and expensive to enforce.