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Juggling ETFs and Counterparty Risk in a Debt-riddled Environment

It's important to closely examine exchange traded funds for potential risks.

CFOs managing exchange traded funds overseas may do well to keep an eye on their counterparty risk. According to Citywire Money, the eurozone debt crisis could threaten banks acting as counterparties to ETFs, and investors will need to keep an eye on the financial institutions' stability.

The uncertainty created by debt crises on both sides of the Atlantic and the memory of past financial disruptions will likely have investors and regulators alike keeping a close eye on FIs. A July survey from U.K.-based Skandia found that many advisers steer clear of ETFs because of the exposure and financial system risks they pose.

"Given the rapid growth in ETFs and the counterparty risk involved, it is not surprising that the regulatory bodies are heavily scrutinizing the ETF market," Skandia investment expert Graham Bentley noted. "Lessons from the past are at the forefront of their minds, and preventing another financial meltdown will be a priority."

Investors may want to think twice before getting involved in ETFs. The retail investment platform operator also noted that several U.K. government agencies, including the Financial Policy Committee, the Serious Fraud Office and the Financial Services Authority, "have also all expressed concerns over the use of ETFs." While "vanilla" ETFs offer a transparent investment that carries several advantages, "synthetic" ETFs create more risk, the company noted.