What Recent Turmoil Tells Us About Technology Risk Management Principles
The trading market suffered an ETFs-driven shock in early August. For technology risk managers, that event should serve as a reminder of the power of post-crises reforms, the multi-faceted reasons for complex system failures, and the dangers of viewing risks through a narrow lens.
By Aaron Brown
A rapid unwind of carry trades on August 5 was one of the biggest financial events of the last month. Although there seems to be no lasting damage from the market turmoil, the mechanism by which it was transmitted — exchange-traded funds (ETFs) — should give risk managers pause.
The event was blamed on the Bank of Japan’s July 31 decision to hike interest rates to 0.25%, and the largest affected ETF was WisdomTree Japan Hedged Equity Fund (DXJ) with $4.1 billion in assets. Worryingly, a similar sell-off in corporate bonds could hit far larger ETFs, like Vanguard’s $320 billion Total Bond Market (BND). Corporate bonds are far less liquid than Yen futures, and ETFs in even less liquid asset classes – like private equity, private credit, venture capital and crypto – have been growing rapidly.
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