ETF Bogeyman, Rogue Trader, or Lack of Oversight?

As the UBS blame game unfolds many are pointing the finger at ETFs, but the responsibility lies with the person not the instrument

Ben Johnson 16 September, 2011 | 5:47PM
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There has been a fresh flurry of criticism of exchange-traded funds (ETFs) in the wake of yesterday’s news that a “rogue” trader on UBS’ “delta one” desk incurred some $2 billion in trading losses. The specific details of the failed trades have yet to be released, but many are already pointing the finger at ETFs.

By way of background, delta one trading desks deal in derivative instruments whose objective is to mimic the performance of an underlying asset or benchmark on a 1-to-1 basis. Such instruments include swaps, futures, forwards, and ETFs. Delta one desks most frequently engage in a variety of arbitrage trades aimed at exploiting price discrepancies that arise between these different instruments.

Regardless of the actual instrument involved in this incident, it is not the vehicle that is at fault. Responsibility for this loss lies with the person that incurred it.

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Ben Johnson

Ben Johnson  is director of passive funds research at Morningstar.