ETF providers have dismissed claims that the losses allegedly caused by an ETF trader demonstrate that the instruments are risky.
In reaction to the US$2bn of losses which came from UBS' ETF trading desk, there have been accusations about the nature of ETFs.
Terry Smith, chief executive of Fundsmith, who has been vocal in speaking out against ETFs, was reported in the Independent as saying: "perhaps they should be banned. Or if not they should be regulated all the way until they are little more than index-tracking funds."
While pointing out that ETFs are in fact index-tracking funds, one London-based ETF head said: "Rogue traders have managed to lose money in many types of instrument over the years.
"I don't think it's the instrument that is at fault, it is the risk controls and management at whichever place the rogue trader has been working. That is the issue more than anything else."
He highlights the infamous case of Nick Leeson, who lost Barings Bank $1.3bn in the early 1990s when he made fraudulent trades in futures. "There wasn't a big outcry to ban futures across the world," he notes.
"There wouldn't be much left if you said all of these instruments that people have managed to makes huge losses on in the past should therefore be banned. There would be no equity futures left in the world or physical commodity products left in the world... people have lost money in all sorts of instruments over the years."
He also notes that it is as yet unknown where the losses were made. There has been speculation that they came from a mis-placed foreign exchange hedge.
Comments have also been made that these events demonstrate the systemic risks that ETFs pose. In a note yesterday, Richard Reid, head of research at the International Centre for Financial Regulation said: "This issue has been further highlighted now by the latest revelation of a huge trading loss in a leading European investment bank, apparently associated with trades related to over-the-counter ETF activity."
He says that although the losses do not seem to have caused any wider systemic problems, "it will raise many questions both about the systemic risks which might emanate from the growth in ETFs as well as the effectiveness of the risk control systems implemented since the onset of this financial crisis".
But as another London-based ETF head explains, "because of the Ucits regulations the losses will never happen at the fund level", adding that it will be the bank that takes the losses.
"The main thing is there has been no impact on UBS ETFs or any other ETF out there," he says. "People have put two and two together and come to the wrong conclusion."
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