Thanks goes to Pete
http://www.businessweek.com/magazine/content/08_17/b4081115284301.htm?campaign_id=rss_null
This March, as the market stumbled over the Bear Stearns collapse, ProShare Advisors posted a small notice on its Web site: "Bear Stearns is not a counterparty to any of the financial instruments held by ProShares." That's about the only information customers of the Bethesda (Md.) manager's most popular exchange-traded funds can get about what investment banks ProShares does business with, however. And it's these banks, or counterparties, that most "bear" funds rely on to take the other side of the complex financial deals that underlie their performance.
Counterparty risk is what MBIA and Ambac bring to the market that everyone is ignoring again. I honestly had not really even thought of the risk associated with the short ETFs.
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Certainly the risk of those positions depends on the kind of instruments one uses. Futures traded on exchanges are safer since you have a escrow account that settles every day, forwards with private counterparties are riskier(credit, product, liquidity , market and operating risks come together). One should think that if companies like proshares need banks to structure such a product, then I understand it must be a sinthetic where to work properly all the components must settle at the same time( lets say that if you need futures, call and puts and there is no bid for one component then there should not be a bid for the product although allegedly the bank should take on that risk)
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