Bloomberg News

European Watchdog’s Chairman Says Complex ETFs ‘a Concern’

September 29, 2011

(Updates with comment on UBS trading loss in fourth paragraph.)

Sept. 29 (Bloomberg) -- European regulators are concerned retail investors are buying more complex exchange-traded funds in search of higher returns, said Steven Maijoor, chairman of the European Securities and Markets Authority.

There is demand by consumers looking for higher returns and “there are all kinds of structured products that are a response to this demand,” Maijoor told journalists in Vienna late yesterday. “We can see that more and more complex products end up in the hands of retail investors,” he added. “That’s a concern for us.”

ETFs are exchange-listed products that mirror indexes, commodities, bonds and currencies and allow investors to buy and sell them like stocks. They became more popular in the aftermath of the 2008 sell-off that wiped $37 trillion from global equity markets because they carry lower fees than other funds, require lower initial investment than futures, can be traded throughout the day and cover most indexes.

While the $2.3 billion trading loss UBS AG disclosed earlier this month was also linked to ETF trading, Maijoor said it wasn’t clear whether it was “inherently” linked to the fact the employee accused of causing the losses was trading in the funds.

“On UBS I’d like to say the facts of the case are not clear,” Maijoor said. “It’s not clear from what I’m reading in the newspapers whether the problem was inherently related to ETFs or whether it could have happened in any derivatives trade,” he said. “We need to wait for the facts.”

More Complex

Maijoor said new ETF varieties were more complex than the straightforward traditional versions and the risks they entailed for investors and financial stability needed to be analyzed. Britain’s Financial Services Authority and the Bank of England’s Financial Policy Committee have this year also warned of a lack of transparency in the ETF market.

“The classical ETF was a product where if you followed an index you would buy, let’s say, the most important stocks of an index and they would be your ETF,” he said. “There is now financial engineering” in the design of so-called synthetic ETFs and “we think it needs to be closely looked at whether those new products are solid, are safe, and don’t have any stability issue.”

ESMA doesn’t have the power to ban such products for certain consumers yet and Maijoor said he hoped the watchdog would get this authority in the future.

--Editors: Zoe Schneeweiss, Christopher Scinta

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net


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