Moriarity on ETFS and Bitcoin (Audio)

panelists herself, Kathleen Moriarty. She's a partner at Case Shoulder l LP. Welcome back to the show. Thank you. I'm allotted to be here. So it was interesting when I've been reading different reports about e t S two, you know, kind of get caught up more on the latest, but a lot of the literature I've read people are thrilled with the growth in the industry, but there's more and more regulatory scrutiny and steps being taken, and I think

some feel, yes, we need it. On the other hand, it's maybe going to make some difference in the way e t S can grow. What's what's kind of the big thing right now? When it comes to regulation. Actually there too. One is um the liquidity proposal that the SEC has put it forward about a year ago, and it will require m portfolio managers, including e t s to um start managing their portfolio in terms of how

liquid the portfolio is. So instead of just paying attention to an index or strategy, they'll also have to pay

attention to how liquid their portfolio is. They'll have to assign different buckets of time frames to each of their portfolio securities, and they'll have to manage their portfolio so that they have a certain minimum of two to three day liquidity, which means almost instantaneous liquidity, and it will start to um alter the way managers manage a portfolio because instead of paying attention to the strategy alone, now

they'll also have to pay attention to this liquidity proposal. Now, it hasn't been adopted yet, so we don't know whether it's going to be adopted in the form it is, or whether it's going to be changed, or whether it's going to be adopted at all, but it's certainly if it is adopted in the form that it's in, it certainly will change how people manage portfolios, and that will that will have an effect on And one of the questions is, um, how will that work with an index

CTF for example, or an index mutual form for instance. If you're following the SMP I five hundred, let's say, and it turns out that your liquidity portfolio doesn't have the minimum requirement, you're going to have to make some changes in order to fulfill your liquidity requirement. But that may mean you're not following the SMP properly. So what

does that What does that really do? Because you've told your investors that what you're aiming for is to replicate or to replicate the performance of the SMP five hundred. But if you start having to change things around in order to make liquidity requirements, you may not make that performance. So there's some discussion as to whether this is even going to be applicable to index UH funds are not, and I don't think the jury is out on that

as well. So that's the kind of thing that will alter to some degree how people manage I don't want to go down the rabbit hole with liquidity, but but I think you raise a very interesting UH point because liquidity works both ways. You can look at it in the past in order to gain some understanding of the future. But the very nature of liquidity is that it can surprise you, particularly when it dries up. What are some of the other going to be penalties as a result

of this? I mean, if you make a good faith effort, and you know department of labor other rules have to do with fiduciary responsibility. If you make that effort, but it doesn't turn out that way, what are the consequences? We don't know. That's exactly right. We don't know. So there's one we when we don't know. It'spetricluseau Wold have said, I do not know what I do not know, but

that's hanging everybody's head. I want to ask you a bit too about bitcoin, blockchain, ETCETERA year ago, that's what WE is discussed and you have been involved with UH working on setting up various kinds of companies, etcetera. So you know a lot about this. In the E t

F world, Where does that stand now? There are two UM E t F products that are in progress right now, and they're both at the same stage, which is to say, they are both in the process of of having their listing rule um adopted or not adopted as the case maybe,

and without that they can't trade. So the Exchange and Exchange has to have a listing rule for every every product that it lists, and there are many many products that fit into a kind of a generic thing, like if you want to listen equity security, there's a standard equity listing rule. You don't have to go and get a special rule. But when you're talking about a new product, you often have to have to get your own in

the sting rule. So both of these products are in that stage, and UM it could be as long as another six months or so before the Commission will make its mind up one way or the other. It's also hard to predict now because the political situation in the election year, the fact that the Commission is not fully you know, UM staffed if you will. So it's it's hard to know exactly what's going to happen. But it's in train. It's the best way I can the best way I can put it. Bitcoin is money, Well it is,

and it isn't. Well well the US judge says it says it is correct. US judge just just well, I don't really know the whole background because I only found out about it today, But apparently there was a UM A Federal court judge who held that bitcoin in the context of the case was money. On the other hand, a couple of weeks ago there was a Florida court judge who held the bitcoin wasn't money. So it's UM. It pretty much has pays your bitcoin and it takes

your exactly. It's still an open question UM in America UM as to whether it is or it isn't. Is there an area of the E t F world that you would say, as an attorney, UH is overregulated at this point, because I know there are some people who are always a little bit concerned about people perhaps not understanding all the risks of ETFs and how they're structured. Is there an area where you would say, if you

were at the SEC or something, you'd be looking at it. Well, I tell you the truth, I think the liquidity thing is an over overrestrictive It is it is, I don't I don't know what prompted this necessarily, there's some thought that the banking regulators either directly suggested it or that the SEC and Defense is trying to keep the banking

regulators from moving into SEC territory. But does it indicate that maybe they're worried about liquidity that they think or they know something that we do not are not privy to who knows. I think sometimes they're always being accused of doing things in a reaction. So I think this is sort of one of those things that they think that we can do this ahead of time. We can, we haven't had a liquidity problem, so let's make sure

we don't have a liquidity problem. But I think that it's not I think it's overly restrictive the way it's right. And but the liquidity issue is not confined just to

exchange traded funds. Because October the fourteenth we get a big change in money market funds as a result of what happened in two thousand and eight, and you may experience, if you own a money market fund, the net asset value going below one dollar or share, and in times of stress, you may not be able to actually get the money out of the money market fun That goes back to that liquidity issue. So what are your thoughts on on that change in the money market fund rules.

I'm not sure. I think I've just sort of accepted it. Um. I was sort of maddened by it when it first came out, but I think I've just gotten used to it. You know, after a certain point, you see so many regulations and you figure pick your battle. So that battle I didn't pick, all right, what battle would would you pick? Right now? I would pick the derivative rule to detail now, the detail, it's too complicated to give it all the details. But basically, in a nutshell, basically, what it's trying to

do is extremely limit uh, the use of derivatives. And this goes back a long way. This, this concern respect a long way, and I think again it's kind of like looking using a sledgehammer to deal with the problem. That's not to say there are no problems with derivatives. There are no problems with portfolio managers. But to sort of, you know, create a one size fits all regulation that will prevent problems from happening is almost bound to cause

problems in the long run. So what would you do instead? I don't know. I think I would be even more selective about it. I would think I would. I wouldn't necessarily regulated by percentage or what have you. I'd have more actually where they do in in a liquidity situation, which is to say, set your own boundaries, you know how, a justification for them, and then followed them. I think that would make more sense than to try to do

these you know, overweening. And in this context, we're talking about things everything from let's say a triple leveraged exchange traded fund to one that's using futures or anything. Almost anything that's not a stock of rabon, almost anything is a is a derivative. Well, this is going to have an effect also on the kind of e t F that are produced and the response to that, because we know they'll would be a way to try to get

around it. Of course, yes, that's my job. That's why we love having Kathleen Moriarty, partner at k Shoulder, telling us all about regulations, et f s and bitcoins. Thank you very much. We are broadcasting from the b n Y Melon et F Symposium in Data Point, California. This is Bloomberg