Counterparties' Credit Risks

Unlike conventional ETFs, with basic assets controlled by the ETF provider to replicate real goods, counterparties subject to the OTC swaps and derivatives that the ETF provider makes or purchases control the assets in synthetic ETFs. Should the counterparties become bankrupt or otherwise unable to fulfill the conditions of the swap agreement, they may become unable to realize the returns promised to investors.

In dealing with synthetic ETFs, it is thus of paramount importance to ensure a thorough check on swap counterparties' financial stability and credit risks. The exchange listing criteria thus require that ETF providers offer a system of evaluating and managing counterparty risks and qualifications as a precondition for listing their synthetic ETFs.