Calls for ban on ETFs after UBS rogue trader scandal


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The Independent Online

City veterans called for a ban of Exchange Traded Funds (ETFs) yesterday as the UBS rogue trading scandal put a spotlight on the financial market's latest money-spinning wheeze.

ETFs have become increasingly popular, and until recently were the only place trading desks were hiring. Yet they have also been dogged by criticism from some in the City and faced scrutiny both in London and on a European and global level, and regulators have been threatening to derail their recent speculator rise.

Terry Smith, the chief executive of FundSmith and a vocal critic of ETFs, aid there were so many issues with the funds that "perhaps they should be banned". He added: "If not they should be regulated all the way until they are little more than index-tracking funds."

Richard Reid, the head of research at the International Centre for Financial Regulation, said the rise of ETFs was "one of the potential sources of systemic risk in recent months," adding it would raise questions about the funds "as well as the effectiveness of the risk control systems implemented since the onset of the financial crisis".

One trader who specialises in the asset class, which has grown at 40 per cent a year according to official figures, conceded that after yesterday's $2bn losses at UBS, "there will be more regulatory scrutiny, as well as a fair bit of consolidation in the sector".

The Financial Services Authority has already expressed concerns as have the Financial Stability Board, theInternational Monetary Fund and the Bank for International Settlements.

Another trader in the City said: "There will be a fear now about how much risk these ETF providers actually have. It's a fragile market and this could well have a knock-on effect."

Mr Smith said: "Some of them arelike index funds, but many aren't. In particular, the performance of short ETFs and leveraged ETFs may diverge markedly from what an investor who believes they are simply index funds would expect."

UBS has yet to confirm that ETFs are at the centre of its scandal.