FT Alphaville " Clients, banks, three-letter acronyms and conflicts of interest Hot on the heels of Goldmanite Greg Smith's admission that clients are perhaps the least of some banks" concerns... The technical committee of the International Organization of Securities Commissions (IOSCO) has taken a stab at sorting through the conflicts of interest to be found within one of our favourite market sectors: exchange traded funds (ETFs). In a consultation report on what principles should govern the regulation of exchange traded funds filed on Wednesday, Iosco makes the following point: In some jurisdictions, intra-group affiliations in respect of authorised participants (APs) also can lead to conflicts of interest; especially when there is a small number of APs. The affiliated AP, if it has the ability to exercise power over the ETF provider through the group parent, has the ability to channel business through in-house trading desks, in order to gain an order flow benefit. Moreover, the group parent may also have the ability to instruct the ETF provider to authorize and de-authorize competitor APs. This conflict may have consequences for the fair pricing of the ETF shares on the secondary market and the ability for investors to redeem ETF shares. This conflict may grow stronger in the scenario outlined by the FSB 37 where the group parent gains a funding and liquidity benefit from ETFs. Synthetic ETFs also may raise potential conflicts of interests where affiliates are involved, for example as the swap counterparty. 38 The conflict of interest risks would be further enhanced by the suspected incentives for banks and financial intermediaries to use ETF assets as a source of funding and/or to reduce their cost of capital under the new Basel III rules 39 . However, these incentives have yet to be confirmed and further work would be required (see Chapter 5). We won't insult your intelligence by pointing out which banks have made a name for themselves in the authorised participant business. Though here's a hint: most of the big IBs are in the game, with some more prominently positioned than others. About time someone drew up a table of authorized participant agreements per bank and HFT shop, no? Related links: Who exactly are authorised participants, anyway? - FT Alphaville Manufacturing arbitrage with ETFs - FT Alphaville If we build it, they will come - FT Alphaville This entry was posted by Izabella Kaminska on Wednesday, March 14th, 2012 at 14:03 and is filed under Capital markets. Tagged with authorised participants, conflicts of interest, etfs, iosco.