Saturday, June 22, 2013

BIS: "Market structures and systemic risks of exchange-traded funds"

There is a potentially big problem here.
Friday's "FT: "ETF Losses Today Were Far Beyond What The Most Sophisticated Risk Models Could Have Predicated" (BLK)" linked to both ZeroHedge and FT Alphaville looking at different aspects of what market participants were observing on Thursday.

There were at least two different areas of concern, emerging markets, where ETF creators could not offload their underlying because most of the EM exchanges were closed and municipal bonds where the ETF marketeers, State Street in particular, didn't want to redeem for cash because the muni market can be very illiquid at exactly the moment a State Street needs to sell. Which exposes a concern with ETF's and which, à l'évidence, reminded me of something, in this case the Battle of Jutland:
There's something wrong with our bloody ships today, Chatfield.*
*Comment of Admiral Beatty after seeing 2200 of his sailors disintegrate. Idiot.
He was, of course, promoted, appointed First Sea Lord and granted an Earldom.
There is so much rottenness in the construction of ETP's (the P being Products, yuck) that you have to be wary of their actual purpose:
....I can't even imagine what kind of portfolio machinations are going on in the background of this critter. One thing you do know, Credit Suisse will benefit as it's not as if the world had been crying out for a senior unsecured obligation of Credit Suisse’s Nassau branch.....
-comment on the CS covered call income silver-linked ETN

or, in a discussion of the gold miner etf:
...One of the quirks of the ETF market allows market makers to create shares for the sole purpose of lending them to short sellers....
From the Bank for International Settlements:
Abstract
Crisis experience has shown that as the financial intermediation chain lengthens, it becomes complicated to assess the risks of financial products due to a lack of transparency as to how risks are managed at different levels of the intermediation chain. Exchange-traded funds, which have become popular among investors seeking exposure to a diversified portfolio of assets, share this characteristic, especially when their returns are replicated using derivative products. As the volume of such products grows, such replication strategies can lead to a build-up of systemic risks in the financial system. This article examines the operational frameworks of exchange-traded funds and identifies potential channels through which risks to financial stability can materialise.
...MUCH MORE

HT: See our second link to vbounded today for commentary.
See also his Heard on the Runway fashion critique:
Faber: long navy/black, TC10y @ 2.5%