Bank of Canada cautions on ETFs, outlines liquidity proposals

Tue May 5, 2015 1:00pm EDT
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By Allison Lampert

MONTREAL (Reuters) - Some exchange-traded funds (ETFs) and mutual funds might face liquidity problems if a large number of investors were to run for the exits at the same time, Bank of Canada Senior Deputy Governor Carolyn Wilkins warned on Tuesday.

She raised the red flag cautiously in a speech in which she outlined central bank proposals to insure markets remain sufficiently liquid under strained conditions. "Should another major bout of liquidity turmoil arise, we will be ready," she promised.

Wilkins also said regulatory reforms and other initiatives such as central bank bond-buying programs might be unintentionally reducing liquidity in secondary bond markets.

And she said a risk worth watching is whether funds such as mutual funds and some ETFs, which investors can sell on short notice, have enough liquidity.

"It's far from clear all investors and savers appreciate the liquidity and redemption risks involved in some funds," Wilkins said in the prepared text of a speech to a Montreal business audience. "I'm not trying to tar all these funds with the same brush, but I would say everyone should be aware of all the risks involved in investing, including liquidity risks."

Among changes the Bank of Canada is proposing, Wilkins listed:

- Reducing the amount of benchmark government bonds the Bank of Canada buys at government bond auctions for its balance sheet, thereby increasing the amount available to other buyers

- Making changes to the bank's securities-lending program to assist primary dealers that need to borrow securities   Continued...

A man walks past the Bank of Canada office in Ottawa March 4, 2015.  REUTERS/Chris Wattie