Risks

OTC Derivatives trading (OTC Swap-type ETF)

A primary example of ETFs which invest in OTC Derivatives trading is the OTC Swap-type ETF. OTC Swap-type ETFs utilize a management method which aligns the fluctuation rate of the net assets per unit with that of an underlying indicator by concluding a total return swap agreement which exchanges the returns of the underlying indicator between the ETF issuer and primarily financial institutions.

Though OTC Swap-type ETFs do not experience tracking errors, they do involve the credit risk of the counterparty to the swap agreement.

OTC Swap-type ETF Credit Risk and Notes when Investing

Many OTC Swap-type ETFs involve both parties to the swap agreement contributing collateral. This mechanism allows for avoidance of loss in the case of one party’s bankruptcy through the exchange of such party’s collateral. However, in the case of bankruptcy for one party to the swap agreement, because the exchange of returns from the underlying indicator are halted, the fluctuation rate of the ETF’s net assets per unit tracking that of the underlying indicator cannot be maintained. As a result, the base value of the ETF may decline.

Additionally, there may be cases where the exchange value is not the same as that of the collateral, depending on the type. As a result, the value of the ETF may decline or be nullified.
When investing in OTC Swap-type ETFs, it is important to confirm the financial health of the parties to the swap agreement and maintain a sufficient understanding of such parties’ credit status.

Mechanism of General OTC Swap-type ETFs

Mechanism of General OTC Swap-type ETFs

  • Actual exchange of cash/securities is conducted by a trustee company (trust bank) under the direction of the ETF issuer.

Example of OTC Swap-type ETF Risk Reduction Measures

OTC Swap-type ETFs listed on TSE employ several measures to reduce credit risk including: not exchanging collateral with the swap agreement counterparty; granting the ETF issuer the right to retrieve collateral in the event that the swap agreement counterparty defaults by having the counterparty segregate the agreement collateral; and, limiting deposit of collateral to highly exchangeable products, such as US Treasuries.

 
Example of OTC Swap-type ETF Risk Reduction Measures

Example of OTC Swap-type ETF Risk Reduction Measures

  • Actual exchange of cash/securities is conducted by a trustee company (trust bank) under the direction of the ETF issuer.

ETFs Investing in OTC Swap Trading

Below are OTC Swap-type ETFs listed on TSE*. The financial institutions that are counterparties to the swap agreement are disclosed in the securities reports. Investors should remain conscious of this information when investing.

  • The investment status for OTC swap trading comes from statutory disclosure documents or other published material, etc. referenced by TSE. For more information, please consult an asset management company.
S&P GSCIⓇ Energy & Metals Capped Component 35/20 THEAM Easy UCITS ETF Class A USD Unit (BNP Paribas Asset Management Luxembourg)icon-block
WisdomTree Commodity ETFs (WisdomTree Management Jersey Limited)icon-block