Tougher ETF regulation?

BlackRock has backed calls for tougher regulation of Exchange Traded Funds (ETFs).

The Financial Times has reported that BlackRock wants to see higher standards of disclosure, with all deals carried out outside of exchanges made public.

Tougher regulation would also see limits on the quality and type of collateral and counterparty.

The ETF sector has come under increasing pressure recently, with various regulatory bodies (including the Financial Services Authority and Bank of England) highlighting the potential risks associated with some of these funds.

Here at Informed Choice, we believe that some ETFs can be suitable for retail investors, although many pose unacceptable risks that are not always appreciated.

Part of our selection process when recommending an ETF is to ensure it uses full physical replication, as this reduces the counterparty risk associated with synthetic replication techniques.

We also seek ETFs in liquid, easily traded markets. The risks associated with using a synthetic ETF in a niche market are, in our opinion, too high for retail investors.

With the recent rogue trader scandal at UBS also shining a spotlight on ETFs, even though in that case no investor assets appear to have been placed at risk, it seems inevitable that the FSA and other regulators will start to take more interest in this market.

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