Thursday, July 7, 2011

ETFs Face U.K. Serious Fraud Office Review

From Bloomberg.com:

U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the proper tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

The Serious Fraud Office, which prosecutes white collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England’s Financial Policy Committee have warned of a lack of transparency in the ETF market.

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 selloff 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.

Terry Smith, chief executive officer at London-based inter- dealer broker Tullett Prebon Plc, has said the products often fail to track the underlying asset whose behavior they’re designed follow, are exposed to a provider going bankrupt and vulnerable to short-selling.

The mixture of “people buying things they don’t understand, complex structures, synthetic structures with counterparty risk, and huge short selling without enough assets in the underlying ETF” to meet demand makes the products sound like “something that we’ve been through before,” Smith said.......read on

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