A Bank of England policymaker has warned about the increasing complexity of Exchange Traded Funds (ETFs) and the risks to investors and the financial system.
In a speech to the Institutional Investor Institute, Paul Fisher, a member of the Financial Policy Committee (FPC) and Monetary Policy Committee, highlighted the developments in markets for ETFs as an example of financial innovation and growth in a "previously small market".
He said: "ETFs are in principle a ‘good' financial innovation - for example, they offer retail investors a cheaper way of getting exposure to the underlying asset (by cutting out the fund manager) and provide a very liquid asset.
"Nonetheless, the rapid growth in ETF assets under management merit attention, given it has been characterised by increasing complexity, opacity and interconnectedness, and as some practices, if left unchecked, could grow to pose risks to the stability of the financial system."
Focusing on synthetic ETFs, he added investors could "unwittingly" take on collateral which would have relatively little value in the event of a default by the ETF provider.
Introducing the FPC's first Financial Stability Report recently, Bank of England governor Mervyn King said regulators needed to pay more attention to ETFs.
He said: "The Committee advises the FSA that its bank supervisors should monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by ETFs."
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