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Mitigating Counterparty Risk with Exchange Traded Funds

Investors need to consider all the risks and regulations

In a heavily regulated sector such as the financial industry, it's important to understand all the risks that an organization's business partners bring to the table, not just the ones it carries itself.

As Finanical News notes, virtually every regulatory body has issued warnings about the risks inherent to exchange traded funds. However, some debate exists as to whether all these alarms are completely merited. ETC concerns may be sparked by memories of the financial crisis, which was created by the less-than-transparent trading practices on mortgage-backed securities and collateral debt obligations, the source reports.

Synthetic ETFs have the International Monetary Fund, Bank for International Settlements and Financial Stability Board concerned about counterparty risk, but Scott Ebner told the source that ETFs are "already very heavily regulated."

Regardless of how physical and synthetic ETFs compare in terms of risk levels, investors would be wise to keep tabs on regulatory changes and counterparty risk, as IntercontinentalExchange's Kelly Loeffler, vice president of investor relations and communications, noted in a recent earnings call.

"Regulatory change will continue to require significant efforts from exchanges, clearing houses and our market participants, but the daily need to manage price risk and counterparty risk will not stop," she said, as quoted by Seeking Alpha.