COUNTERPARTY RISK

QUESTION:  In regard to counterparty risk when purchasing exchange traded funds or notes: With European banks being under capitalised due to the excessive risk undertaken due to the EU regulations regarding bailouts, how can we measure the threat of each counterparty which has backed each ETF. Would it be safer to consider only ETFs with US counterparties, or is just another risk we have to take on board. Do we avoid these types of instruments in favour of choice companies.

ANSWER: If you wish to use ETF’s, as they are extremely cheap and liquid, the large US names such as Vanguard, State Street etc. are available. We often write to hold the physical share certificate as the same as holding tangible assets but realize it is very difficult to take delivery.