ETFs include shares, bonds or commodities traded like stocks and are gaining popularity among retail investors who are looking for cheap access to indices without having to buy the underlying securities.
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According to some critics these funds hold hidden risks which might leave small investors exposed to "synthetic" instruments based on complex derivatives.
This is where the regulators have moved to address the concerns by proposing new European rules to make product providers clearly distinguish between funds backed by real assets and their more synthetic counterparts, reports Reuters.
Rather than physical assets exposing investors to collateral and counterparty risk, international watchdog such as the Financial Stability Board (FSB), the Bank for International Settlements and the UK’s Financial Services Authority (FSA) are worried about the use of derivatives.
It is expected that the European Securities Markets Authority (ESMA) will publish new draft guidelines on improving standards of transparency and much greater disclosure by ETF providers in 2012.
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