http://wallstreetonparade.com/2016/02/as-madoff-airs-on-tv-two-anonymous-whistleblowers-are-pounding-on-the-secs-door-again/"The two anonymous authors have one thing going for them that Markopolos did not. They are represented by a former SEC attorney, Peter Chepucavage, who was also previously a managing director in charge of Nomura Securities’ legal, compliance and audit functions. [...] Chepucavage said further that these clients have significant experience in trading ETFs and data collection involving ETFs. Throughout their letters, the whistleblowers use the phrase ETP, for Exchange Traded Product, which includes both ETFs and ETNs, Exchange Traded Notes. In a letter that was logged in at the SEC on January 13, 2016, the whistleblowers compared some of these investments to the subprime mortgage products that fueled the 2008 crash, noting that regulators and economists were mostly blind to that escalating danger as well."
"These two anonymous whistleblowers are not the only individuals that are calling attention to the threat to the markets posed by ETFs. [...] The Office of Financial Research (OFR), a unit of the U.S. Treasury which was created under the Dodd-Frank financial reform legislation to provide research to F-SOC on emerging risks in financial markets, included a special section on looming dangers in the ETF market in its 2015 Financial Stability Report. [...] The report notes the following:
“The high concentration of ETF market-making activity reinforces this risk; the top three dealers account for 50 percent of reported trading volume…We note a paucity of reliable data regarding ETF market-making activity, which prevents regulators from fully identifying potential vulnerabilities in this sector." [...] “Some of the larger market makers in the ETF market also appear to gain access to liquidity by placing ETF shares as collateral in the repo market. This finding is based on the Securities and Exchange Commission’s (SEC’s) Form N-MFP data on money market fund portfolio holdings. (Incomplete collateral information limits our visibility on the financing of ETF shares in relation to other types of cash investors.) Consequently, a disruption in the dealer funding markets could affect a market maker’s ability to finance its inventory in ETF shares and decrease the amount of liquidity it provides to support ETF trading."
Extensive quotes from all of their letters and other public docs are woven into this posting--- well worth the read.
h/t to Joshua Brown for calling attention to this piece
http://thereformedbroker.com/2016/02/05/etf-whistleblowers-make-explosive-allegation/
