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The Growth of Global ETFs and Regulatory Challenges

Reena Aggarwal and Laura Schofield

A chapter in Advances in Financial Economics, 2014, vol. 16, pp 77-102 from Emerald Publishing Ltd

Abstract: Abstract Purpose Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market, they have become popular among both retail and institutional investors. The original ETFs were simple and easy to understand; however, recent products, such as leveraged, inverse, and synthetic ETFs, are more complex and have additional dimensions of risk. The additional risks, complexity, and reduced transparency have resulted in heightened attention by regulators. This chapter aims to increase understanding of how ETFs function in the market and can potentially impact financial stability and market volatility. Design/methodology/approach We discuss the evolution of ETFs, growing regulatory concerns, and the various responses to these concerns. Findings We find that concerns related to systemic risk and excess volatility, suitability for retail investors, lack of transparency and liquidity, securities lending and counterparty exposure are being addressed by both market participants and policy makers. There has been a shift toward multiple counterparties, overcollateralization, disclosure of collateral holdings and index holdings. Originality/value The analysis contained in this chapter provides an understanding of the role of ETFs in the financial markets and the global economy that should be valuable to market participants, investors, and policy makers.

Keywords: Exchange traded funds; regulation; synthetic ETFs; leveraged ETFs (search for similar items in EconPapers)
Date: 2014
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