NEW YORK, March 11 (Reuters) - Asset managers and exchange traded funds should be watched closely by authorities in case investors liquidate risky investments suddenly, the director of the IMF’s Monetary and Capital Markets Department wrote in a blog post on Wednesday.
ETFs have been swept up in the stock market rout as investors flee on worry that the fast-spreading coronavirus will knock economic growth and corporate earnings.
The three main stock indexes came within a hair’s breadth of confirming bear market territory, implying a drop of 20% from record highs, on Monday. The benchmark S&P 500 is now about 15% below its all-time high hit just three weeks earlier.
Authorities should “be alert to possible financial stability threats from outside the banking system,” wrote the IMF’s Tobias Adrian in the blog post. “This requires an increased focus on asset managers and exchange traded funds, where investors might liquidate risky investments suddenly.”
Adrian also wrote that large swings in asset prices can quickly put markets and institutions under pressure.
“While market functioning has been able to withstand large swings in asset prices so far, anecdotal evidence suggests that liquidity has been tightening in many markets,” he wrote. “And there are strains in U.S. dollar funding markets, where non-U.S. banks and corporates borrow in U.S. dollars.”
The precipitous drop in global equity markets has already seeped into higher demand for dollar funding, putting investors on guard for the kinds of money market stresses that tend to exacerbate cross-border financial crises.
Reporting by Megan Davies Editing by Chizu Nomiyama