AMF becomes latest regulator to soften stance on ETFs following liquidity test

In 2017, the AMF said ETFs 'can amplify volatility on underlying markets'

Tom Eckett

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Exchange-traded funds acted more as a “shock absorber than a shock amplifier” during last March’s liquidity test, according to the Autorité des Marchés Financiers (AMF), in what signals a shift in sentiment from comments made by France’s regulator in 2017.

In an article for the World Federation of Exchanges earlier this month, the AMF’s managing director Philippe Guillot and senior policy adviser Franck Raillon said ETFs incorporated information faster than net-asset values (NAVs) during the period of rapidly vanishing liquidity last year.

“The March 2020 crisis highlighted the role of ETFs as a useful instrument facilitating price formation in increasingly illiquid market segments during that month’s peak volatility episode,” the duo wrote. “During this period, the corporate bond market practically froze while ETFs tracking fixed income indices…continued to be heavily traded.”

Highlighting this, the iShares $ Corp Bond UCITS ETF (LQDE) changed hands 1,000 times on 12 March while its underlying securities traded just 37 times over the same period.

“ETFs have weathered the COVID-19 crisis quite successfully and, at least temporarily, may have reassured regulators and prudential authorities,” they added.

This represents somewhat of a shift for the French regulator which in 2017, warned about the potential risks from the rapid increase in ETF adoption both in France and globally.

“The AMF is of the opinion that if investors continue to be drawn to ETFs, sustained vigilance will be required during periods of market stress,” it warned. “During such periods, ETF units are liable to trade at a significant discount, and correlation effects can amplify volatility on underlying markets.”

Mutual fund liquidity mismatch pushing investors to ETFs

Along with the AMF, the Bank for International Settlements (BIS), the Bank of England and the European Systemic Risk Board (ESRB) have all appeared to soften their stance towards the potential systemic risk ETFs can cause to financial markets.

For example, a BIS study in 2018 warned there was a risk corporate bond ETFs could cause systemic risks as they are weighted in terms of total debt, however, following the March 2020 volatility, it argued ETFs incorporate information “in a more timely manner” than the underlying market.


Despite the positive view on the role of ETFs in periods of illiquidity, the AMF did highlight a number of emerging challenges for the ecosystem.

Firstly, the potential for short and leveraged exchange-traded products (S&L ETPs) to amplify shocks in the underlying market, especially as the segment gains in popularity.

Because S&L ETPs rebalance at the end of each day, if markets continue to fall, the AMF said this forces these strategies to sell the underlying securities.

“The potential impact of their growth on financial stability should be watched carefully,” they warned.

Elsewhere, the duo highlighted the increasing popularity in ETFs offering exposure to ESG themes – namely clean energy – where the investable universe is more limited.

When inflows surged into BlackRock’s two clean energy ETFs last year, this buying pressure inflated the prices of the underlying securities. One example of this was Plug Power which rose 1,936% from the start of 2020 to its peak on 5 February this year.

“An imbalance of inflows into such ETFs may impair the capacity of the underlying market to absorb such flows.

“This could result in inflated prices of underlying assets that would not necessarily reflect a rational anticipation of forward-looking performances of the companies in the underlying basket.”

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