Collateral Risks

Funded swap synthetic ETFs require setting up collaterals in an attempt to minimize the exposure of counterparty risks. Risks may increase under this ETF structure when wrong assets are collateralized or the value of collateralized assets abruptly depreciates.

In order to ensure proper management of these collateral risks, there are rules that require ETF providers to manage their collaterals according to the proper criteria of collateralization, collateral ratios, and criteria of liquidation. In addition to requiring ETF providers to form such systems of collateral management, exchanges also require them to publish information on counterparty risks.