Banks seek to allay ETF investor fears Wall Street banks took steps to reassure investors that the plumbing beneath the $2tn exchange traded fund industry was secure, a day after heavy selling led to rare disruptions to normal trading. ETFs track baskets of underlying assets, from stocks to bonds to commodities. They trade like equities and have become popular among all kinds of investors in recent years. The boom has also made the funds an important source of profits for the asset managers, such as BlackRock, State Street and Vanguard, that create them. But a furious sell-off across global markets this week left at least one primary dealer of ETFs and one leading issuer of the products struggling to keep up with the selling. The fissures that appeared on Thursday have shed light on the complications that can arise in moments of market stress for banks" dealers. Citigroup confirmed a Financial Times report that its ETF desk was unable to fulfil any more redemptions on Thursday after hitting internal capital limits on the amount of collateral it could have out. Heavy trading in ETFs that track securities in parts of the world not open during segments of the US trading day means that dealers must post collateral when they seek to redeem cash or the underlying asset from issuers of the ETF. Citi said in a statement yesterday: "Citi has self-imposed capital limits on desks generally, including the ETF desk, and has limits on the amount of ETF redemption business we can do on a nightly basis. Given recent increases in volume, we hit those limits. It added: "The fact we hit our limits is a function of our internal requirements and is not related to any specific ETF or ETF issuer. We have a strong commitment to our ETF business, and are currently re-evaluating our limits to make sure that we are best serving all ETF market participants and supporting the continued growth and development of ETF markets. State Street said it had resumed redeeming municipal bond funds for cash after stopping accepting requests on Thursday. The bank added that "in-kind" redemptions were accommodated on both days. It added: "Cash redemptions in the . . . municipal bond funds are a day-by-day decision by the portfolio manager, and the cash option is an added flexibility when deemed appropriate by the portfolio manager. The approval processes built around cash redemptions are with the intent of protecting existing investors in the ETF. While rare, industry observers said the risks of such an event happening were spelt out in prospectuses for the funds. Deborah Fuhr, managing partner of Etfgi, a research firm, said: "The wording in prospectuses gives providers of ETFs the ability in extreme circumstances to not facilitate redemptions." She added: "But it doesn't normally happen."