According to Bloomberg, Laurence Fink, the chief executive of BlackRock, has accused synthetic (swap-based) exchange-traded funds of exposing investors to unnecessary and unadvertised counterparty risks. BlackRock is the world’s largest asset manager and its iShares subsidiary is the largest issuer of ETFs both in the US and Europe. Fink was speaking at a conference in New York organised by Bank of America Merrill Lynch in November, Bloomberg reported.

Fink left himself open to claims of misrepresenting synthetic ETF structures, however, by reportedly claiming that “If you buy a Lyxor product, you’re an unsecured creditor of SocGen”. French bank Société Générale (“SocGen”) is Lyxor’s parent company, and provides the derivatives (swap) contracts that guarantee the index returns to Lyxor funds.

In response to Fink’s reported comments, Laurent Seyer, chief executive of Lyxor, said that “Attempting to present Lyxor ETF’s investors as Société Générale’s unsecured creditors is a wrong and misleading assessment and not allowed under UCITS.”

“The facts are clear and transparent, because Lyxor ETFs hold physical assets alongside the swap and these physical assets represent 100% of the fund’s NAV,” added Alain Dubois, Lyxor’s chairman. “So the Lyxor ETF holder has zero counterparty risk.”

Unlike exchange-traded notes (ETNs), listed certificates and structured notes, which rank equally with senior unsecured debt obligations of the parent bank and where a default of the issuer exposes investors to the potential total loss of their capital, European ETFs that follow the UCITS fund guidelines, including those issued by Lyxor, are structured as funds and are thereby designed not to carry full counterparty risk to the swap provider.

Under UCITS, uncollateralised counterparty risk to a single financial institution is limited to a maximum of 10% of a fund’s net asset value. Since investors started to pay increasing attention to counterparty and collateral risks in fund structures, including ETFs, following the onset of the financial crisis in 2008, many synthetic ETF issuers have moved to collateralise their funds fully, or to overcollateralise them. The mechanism by which investors in synthetic funds can access their funds’ assets or collateral has yet to be tested in a default scenario, however.