Systemic risk watch
Synthetic ETFs
Last year,
Bank of England analysts wrote:
Synthetic ETFs exhibit more of the characteristics
that might contribute to the build-up of systemic risk. They are more complex
than physical ETFs, although the degree of complexity remains far below that of
some structured credit products developed in the run-up to the crisis. The
derivative transactions between ETFs and affiliated banks (or those that the
bank itself might undertake to gain exposure to the index) result in the build-up
of counterparty credit exposures between market participants. And synthetic
structures might pose funding liquidity risk to banks acting as swap
counterparties if there is a sudden withdrawal of investors from the ETF
market.
There’s an extremely good
discussion of the risks of synthetic ETFs in this paper by the Bank for International Settlements. But the short version is that all of
the risks get bigger when you see a large pronounced move to withdraw funds at
once
Source: http://qz.com/74495/how-the-violent-gold-collapse-may-pose-a-systemic-risk-to-the-financial-system/
Insurance-linked
securities provided by G-Siis
Regulators
are targeting insurers’ use of variable annuities and insurance-linked
securities in their fight against global systemic risk. But insurers say these
products are fundamental to the way the insurance industry works. Louie Woodall
reports
The
pressure is now on to reach an accord. By the end of the second quarter, the
FSB will have published its first list of designated G-Siis (global systemically important
insurers), and the IAIS should have finalised its policy proposals for the
heightened regulation of these higher risk groups. But time is running out for
the major insurance groups in the regulators’ spotlight, such as MetLife,
Allianz, Axa and Prudential Financial, to make their case.
In
practical terms, G-Siis will need to ring-fence their NTNIA and place them in
separate entities to eliminate the threat of these risky activities inflicting
losses on the insurer’s core balance sheet. They may also find themselves
subject to an additional, higher loss-absorbency capital charge.
The fundamental purpose of identifying such activities
and loading additional regulatory requirements onto the insurers that engage in
them is to avoid a repeat of the shock collapse of AIG in 2008, and discourage
firms from dabbling in the dark art of shadow banking.
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