In its bi-annual Financial Stability report, the Bank joined the likes of the IMF, the Financial Stability Board and the UK’s Financial Services Authority in cautioning on ETF structures.
The report suggests it is possible that “the additional risks associated with synthetic replication might not be fully understood by investors who are attracted by the lower costs”.
The BoE also has concerns over the role played by short-term investors, saying “where the main investors in complex products have short investment horizons, and are leveraged, such as banks, there is greater potential for destabilising fire sales”.
Though it notes that banks are not involved in the ETF market as outright investors, it says their exposure to the market is increased via the increasingly widespread use of synthetic ETFs.
“While UK banks do not currently appear heavily involved in the ETF market, the use of structured derivative transactions via synthetic ETF structures has become a material source of funding for some European banks,” the Bank’s interim financial stability committee said in the report.
