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, these replication strategies can lead to a build-up of systemic risks in the financial system.
© BIS - Bank for International Settlements
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