The Financial Stability Board (FSB) has warned recent innovation within the ETF industry is bringing "new elements of complexity and opacity" into the market.
The FSB, established to coordinate the work of financial regulators across the globe, made the comment in its note entitled Potential financial stability risks arising from recent trends in ETFs.
The paper, published today, argues the "remarkable" growth of the industry warrants increased attention from both supervisory bodies and the ETF industry as a whole, "including providers, market-makers and investors".
A specific area of concern is the increased provision of synthetic ETFs, where the use of swaps "may constitute a powerful source of contagion and systemic risk."
However, providers of physical ETFs who are showing a more intensive recourse to securities lending also come under scrutiny.
The evolution of the industry beyond equities into fixed income, credit, emerging markets and commodities comes under fire for accessing asset classes where the FSB says liquidity is thinner and transparency lower.
The FSB's stance echoes similar comments made by the FSA in its Retail Conduct Risk Outlook 2011, and follows concerns raised last week about the liquidity risks involved with certain ETFs.
The FSB claims banking supervisors "are in the process of stepping up their monitoring of the ETF market" and points towards likely areas of future regulation.
The report says: "Imposing higher disclosure and reporting requirements as well as regulatory and other limits could help to alleviate the risks emerging in complex instruments".
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