07 March 2013

EBA publishes Good Practices for ETF Risk Management

The European Banking Authority (EBA) issued today an Opinion addressed to National Supervisory Authorities (NSAs) on Good Practices for the Risk Management of Exchange Traded Funds (ETFs). ETFs are generally securities that track a commodity, an index, or a basket of assets like an index fund, but trade like a stock on an exchange and therefore experience price changes throughout the day.

This report is designed to outline a high level description of Good Practices with respect to the management of key risks that credit institutions encounter through their ETF business units, or when dealing with ETFs. Good Practices attempt to ensure that potential risks associated with ETFs are managed adequately from the perspective of the credit institution – and indirectly from the perspective of its customers. More specifically, the Good Practices intend to bring some guidance to the evaluation of risk that might emerge at bank level through their operational relationships with ETFs. These Good Practices do not focus on risk management on fund level or on direct aspects of consumer protection.

The actual mode of implementation of the Good Practices will depend heavily on the very specific setting and characteristics of the institutions concerned, including the level of their involvement in the ETF business and the relevance of those activities. While some Good Practices may already be applied, for some market participants even stronger standards may be appropriate.

The Good Practices attempt to ensure that potential risks associated with ETFs are managed adequately from the perspective of the credit institution – and indirectly from the perspective of its customers. They will ultimately contribute to the convergence of supervisory culture and practices in the EU.

The Good Practices include a list of relevant questions to assist NSAs in gaining an accurate picture of banks’ involvement in the ETF business, and the adequacy of banks’ management of associated risks such as liquidity and market risks.

The Good Practices are adopted as an EBA Opinion under Article 29(2) and are, therefore, not legally binding. Their implementation will depend on the specific characteristics of the credit institutions concerned as well as on their involvement in ETF operations.

Press release

Full opinion

© EBA