The EconomistMarch 21st 2020 Finance & economics 69Exchange-traded fundamentals
United States, exchange-traded funds, premium/discount
to net asset value at March 17th 2020,% of fundsSource: Bloomberg<-5%-2.5% to -5%0% to -2.5%2.5% to 0%5% to 2.5%>5%0 5 10 15 20 25 30 35 40 45MixedCommodities
BondsEquitiesJeremiads have long argued that if some of the $6trn-odd of assets underpinning
exchange-traded funds (etfs) are illiquid, then the funds must be too, posing a big risk to
their investors. But so far there are signs of strain but not panic. During the current
turmoil, some etfs are trading at a discount to their net asset value, often those that
have invested in debt. But that may be because they are easy to trade, making them a
better gauge of reality than the last recorded price of the underlying securities.Two versions of realityhad $13trn-worth of dollar liabilities, ac-
cording to calculations by Iñaki Aldasoro
and Torsten Ehlers of the Bank for Interna-
tional Settlements. Only 22% of this total
was booked with branches or subsidiaries
in America. The rest was out of the Fed’s
immediate reach.
The Fed can, however, reach out to its
fellow central banks. And they, in turn, can
help commercial banks within their own
bailiwicks. On March 15th the Fed eased the
terms of its swap lines with central banks
in the euro area, Japan, Britain, Switzer-
land and Canada. Two days later, the Bank
of Japan offered over $30bn in 12-week
loans, the largest amount since the
2007-09 global financial crisis. The Euro-
pean Central Bank followed up with $112bn.
That narrowed the “basis” that must be
paid to obtain dollars through foreign-ex-
change swaps.
Fed-watchers immediately began won-
dering if it would expand its swap lines to
include prominent emerging markets.
There is precedent. The Fed’s first swap line
to Mexico dates back to 1967. And in Octo-
ber 2008 it also offered lines to Singapore
(which even then was overqualified for the
role of emerging market), South Korea and
Brazil (the “dodgiest of the lot”, according
to Richard Fisher, then president of the
Dallas Fed). But Fed officials back then
were, and still are today, reluctant to serve
as central bank to the world. Transcripts of
the October 2008 meeting indicate that
several other emerging markets (their
identities remain redacted) had already in-
quired about joining the Fed’s magic circle.
“We have done everything we possibly can
to discourage” such approaches, said one
Fed economist. “We’re not advertising.” 7I
nsofar as stockexchanges used to wor-
ry about viruses, it was of the type that in-
fect the computers through which virtually
all trading is done. But on March 18th the
New York Stock Exchange (nyse) became
the latest venue to announce that its trad-
ing floors would close in response to the
covid-19 disease, and that trading would
become fully electronic from March 23rd.
Such closures, amid extreme market vola-
tility, may add to calls that all securities
dealings should be suspended in response
to the pandemic. But Stacey Cunningham,
president of thenyse, was not alone when
she insisted that markets should stay open.
With the world scrambling for cash, it
would be the height of foolishness to shut
off access to the capital markets.
Some markets have come perilously
close to a prolonged shut down. On March
17th the Manila stock exchange was sus-
pended as part of a lockdown on the main
Luzon island. But amid fears of a backlash
from investors, stock trading has resumed.
In America Steven Mnuchin, the trea-
sury secretary, has mulled over the pos-
sibility of shortening trading hours,
though he insists markets should stay
open so savers can access their stockmark-
et holdings. Terry Duffy, the boss of cme
group, a derivatives exchange, said cuttingback trading time “makes no sense ... espe-
cially during this unprecedented crisis
when news, information and events are
changing at such a rapid pace.”
When markets have closed in the past, it
has usually been because of some physical
limitation on their ability to operate—for
example after terrorist attacks in Septem-
ber 2001, or in the wake of storms. Big ex-
changes stayed open during the financial
crisis of 2007-09. When Greece closed its
stock exchange in 2015 for five weeks dur-
ing capital controls, bank shares fell by
30% on the first day that trading resumed
and the overall market dropped 16%.
Closing venues for health reasons is less
serious than it used to be because so much
trading is done electronically. Banks have
been rushing out business continuity
plans to ensure markets can continue de-
spite potential lockdowns. Traders are in
theory able to work from home. Yet having
lots of them operating remotely will pose
challenges of its own, says one banker. The
biggest is the plethora of rules to prevent
market abuse by people on bank trading
floors. Regulators are being informally
asked to relax some restrictions temporar-
ily, such as the need for all conversations
by traders to be recorded.
The most tangible trading restrictions
so far are on “short-selling”, which allows
investors to profit if prices drop. Several
European countries including France, Italy
and Spain have limited the practice. Hedge
funds worry that credit-default swaps, a
sort of insurance policy which pays out if a
company goes bust, may become difficult
to collect because of political pressure. But
the end result of such meddling is that in-
vestors who might have hedged their exist-
ing positions—so protecting themselves
against further losses—are likelier to sim-
ply sell what they own and stay away.^7Trading will adapt to new
conditions—if politicians let itClosing stock exchangesThe pits
At the close2