♪ , thef, blackrock ceo company is seeing huge inflows in part because of mifid 2. >> we look at it as a net positive. mifid ii is creating more transparency. bitcoin, blue morbus, we discuss the future of cryptocurrencies and if regulators can work fast enough to effectively role in the changing marketplace. , after it goes

into place, what is there to look forward to? >> welcome to bloomberg markets, rules and returns i am nejra , cehic in london. where we dig into the opportunities for markets around the globe. from mifid two to dodd-frank, we speak to the top newsmakers and participants shaping and reacting to a new generation of rules. let's kick this show off with etf's. is expectedfid ii to increase flows from retail investors in the u.s. to raise their exposure to etf's. to talk about the impact that mifid ii will have on etf's in europe, stephen, so great to have you on the program. i have brand-new hot off the press intelligence research

to $2 etf's may double trillion in five years on mifid ii. let's talk about growth. is that the sort of growth you expect as a result of mifid ii? >> it is the kind of growth we expect. mifid ii will play a big part in it. you are seeing as you have over the last two years in the u.s., a shift towards utilizing etf's by all types of investors in their portfolios. mifid ii is one of the catalysts that should accelerated. nejra: what is it about mifid ii that could provide a positive catalyst. more transparency, the fact that fewer etf's might be traded over-the-counter? can divided broadly as a relates to etf's into two camps. one is the impact on and investors and retail investors and the other is more around the trading infrastructure and ecosystem that mifid ii is going

to drive. a lot of it is about transparency. if we think about retail, investors, traitor jet -- greater transparency, it is changing the portfolios that they are thinking about owning in the products they own within that. etf's benefit significantly. in the u.s. over the last year we have seen that. on the trading side, one thing 1 didn't do was include etf's in trade reporting. a lot of over-the-counter, what that means is, some investors, they are not sure what is going on in etf's. even though there is volume and trading going through. tose rules will shift creating more transparency. i think that will create more a lotence that there is of volume in these products and investors can think more broadly about how to use them. wondering if confidence comes with competition. blackrock dominating the etf

market in europe. you control five times the assets of your nearest rival. you expect more competition? the second sir new at all and do you think that would be across all asset classes? as a grows, broadly, what we think is anyone who is looking at the etf market can play a positive role in driving greater adoption. ultimately this is a industry where you have large players and che.e players -- and i that this could be a positive boost for the etf industry but it could take a while for this to translate into something tangible. how long are you thinking it could take and why exactly? is it about the fragmentation of the european market or something else? >> there are certain rules that can have an immediate impact, the transparency from the trading side. there are other parts of the

rules, around the retail wealth and distribution rules that will start to kick in around transparency in 2018. the business models take time to change. as they change over the next couple of years, we will then start to see the acceleration in etf adoption. over the next two to three years you will start to see the catalyst kicking in. nejra: what can the industry do in order to get over some of these barriers that you have outlined so that mifid ii lives up to its transformative potential? >> a lot of it is education. there is education that needs to be done in europe for and investors about what an etf is and the role it can play. the media will play an important role within that as well. in terms of helping investors think through what is going to get, a portfolio that is going to deliver the outcome they need

depending on where they are in life. and the role that etf's can play. education to me isget critical r people embracing the value of the products. nejra: the media will ask the difficult questions. etf'stors aren't seeing in europe as a risk at the moment. what could make the industry a victim of its own success to the point that regulators do start to be concerned apart from growth? >> the duty as etf providers is to ensure that the products we create are suitable for investors. that is something that is on us. we have a duty to continue to educate regulators. as we go through these changes, as the industry grows and changes, and you see the rise of new types of investing, such as factor investing through etf's, educating the regulars in a way that we are educating clients. constant dialogue

back-and-forth with regulators to make sure they are comfortable and understand the way the industry is evolving and what we are doing to safeguard that. nejra: one final question. the landscape is changing in europe. it is different when you look at europe and the u.s. in terms of demand for etf's for retail versus institutional. do you see mifid ii boosting retail and retail institutional demand in equal measure? >> i think it will increase both. in terms of those two pieces to mifid ii. one around the distributor and transparency costs, that is focused on the retail and retail wealth market. the trading cost transparency in the trade reporting really boosts the institutional uptake. if you look at the u.s., you have seen that over the last couple of years. that is what we will see in europe over the next three years. nejra: thank you so much, stephen cohen, at blackrock. up next, beyond mifid ii, as the

legislation goes into place, what does the buy side have to fear. this is bloomberg. ♪

♪ welcome back to bloomberg, rules and returns. let's get a roundup of the latest news on financial regulation. there is sebastian. >> morgan stanley is ready to charge two point $5,000 an hour to a new eu financial rules. that will be on top of the annual rate the bank plans to

hand to some clients. the charges almost twice the rate of top commercial lawyers. bitcoin has hit record highs rising above $5,000 for the first time ever. the sharp gains come despite criticism from the biggest names on wall street including jamie dimon. the cryptocurrency faces a clampdown by the people's bank of china. that is your regulation news roundup. nejra: thanks so much. keep a large part of the regulatory community busy for many months after january 3. that is according to the chairman of the european securities markets of authority. what else should be -- what else should the buy side be looking too. , sean, great to have you on the program. thank you for joining us. we are done with

global financial crisis regulation and the ship will be more to policy debates. what did you mean by that? piece ofs the last big regulation that came out of the crisis. when we get to the other side of mifid ii the landscape changes. there are far fewer regulations that need to be implemented and the focus of policy will be on looking at the regulatory framework and see what needs to be tweet or if new rules -- to be tweaked. next year globally will be the etf industry. the tremendous growth of the industry in the last 10 years has knock gone unnoticed by policymakers. they will take a step back and look at the framework and see what needs to be changed, if anything. this year, a paper published on expected, the one process is already being done in some ways. nejra: we were just talking to stephen cohen about how much

etf's in europe have to grow is moree, arguing there potential from the growth we have already had. what exactly do you think regulators might start looking at? europe, guidance around etf's in 2012, if you look at the work program, they will take a second look at that guidance. if youey are looking at, look at the etf industry growth trajectory, ensuring the framework is best suited for the industry. the industry would welcome this review. it is not about hampering growth, it is more making sure that the regulations are --lored to the specific t nejra: how should asset managers look at this? >> is generally viewed as positive.

active managers are eager to see how they can leverage the etf structure to create products for themselves and their clients. activea review of the etf strucs and framework would allow active managers to work with. side, on thee buy regulatory front, there is a lot to look at. we talked about raising exposure to etf's. moving away from etf's, some part of fiduciary took effect in this year. is seen as having the biggest impact on brokers and insurance agents. big broadly, will it be a blow to active management and a boost for passive? >> it will be a headwind for active managers. with a fiduciary role comes a shift from a commission-based model to a fee based model. on the broker side, the concern

is that it will lead to using , low-cost index products over active products. it creates another headwind on the active management side. that is why they are pursuing regulators to open the rules around etf's, to allow them to package products in a different way. nejra: interesting. the derivatives rule is something else to be aware of. companies that use derivatives to hedge risk. on this front does it look like the regulator he burdens will be eased? >> the fcc a few years ago introduced this rule which was to address the embedded leverage within u.s. mutual funds. receptiond a chilly from the industry and it has been on hold since then. it remains to be seen if that rule will ever be progressed. if it is, it will probably be tweaked considerably from its original format. reforms in europe

in particular for the asset management industry, that the buy side needs to get their head around, how far they from doing that? >> the big item for asset managers, closely tied to brexit is a review of the rules around delegation of asset management for european mutual funds under the user framework. there is this issue where many of the functions are delegated back to london or hong kong and there are regulators in europe who are unsatisfied with that arrangement. there is a push to review that and see if you need to have stricter rules around delegation. that could have a substantial impact on global asset management. in particular europe and london. nejra: with all this regulation on the cards other than mifid ii , what does the buy side look like after it has absorbed all this legislation?

>> once we get through mifid ii and it is digested, the ultimate look of the asset management industry is it will be more transparent than it was before. it will see pressure on fees that it hasn't seen before. i think there will be more foretition around, investors and that will be a good thing. nejra: sean, thank you so much. had a regulator he intelligence -- to have you on the program. coming we talk cryptocurrency, -- soarso is above above $5,000 for the first time. we get the latest from washington. this is bloomberg. ♪

♪ welcome back to bloomberg markets, rules and returns. there are two side to do introducing new regulation. the one hand, regulation builds credibility and confidence in the marketplace. when the rules are not clear it creates uncertainty for market participants. editor-in-chief, we spoke with

him in chicago. market is good for the is to make sure you don't limit participants to the marketplace. liquidity is critically important. participation in times of stress. when things are where they are in times, low volume, of distress, you want to make sure everyone is in the marketplace. >> dodd-frank or -- volcker, the way it was written, it was ill advised at best. i did not support that. i believe the banks should be allowed to trade. there is nothing wrong as long as they are regulated. there liquidity is critically important to the marketplace. i did not like to see them taken out of certain asset classes. you can prop traded u.s. treasuries on the cash side that you can't prop trade on the

future side of u.s. treasuries. some say, that is no good. we went from 47% of the u.s. treasury trade in the united are at 87% of the trade on the u.s. treasury market. when you look at counterparts in europe, they are at 400% of the trade. we are starting to move forward in that direction. i'm not sure if that is because of the laws or the efficiencies of liquidity but my point is, we should not have the banks eliminated from those pools of liquidity because even though we are not moving a lot right now stuff you the mentioned, stress will come to the marketplace and you want those people in there. itra: let's talk bitcoin as spikes above $5,000 for the first time. said thef ubs has world's wealthiest individuals are staying on the sideline when it comes to cryptocurrencies. an exclusive interview with bloomberg. curious that they

are willing to invest. i don't think there is any for high netsire worth individuals to take big bets on this phenomenon. let's keep the conversation on cryptocurrencies and how regulators in the u.s. are keeping up with the new technological advances. a government analyst for bloomberg intelligence joins us now. he is in washington. nathan, great to see you. thanks for joining us. surging to record after record, china central bank has stepped up regulations on digital currencies. how u.s. regulators, i'm theyring, block chain, are are unregulated, an asset class apart from the financial system? what the regulators are doing is they are using existing regulations and existing law to deal with it.

with the fcc for example, and we are this with the initial coin , they are offering coins in exchange, they are looking at it and saying, that is a security so we will put it under securities law. the trading commission looking at bitcoin futures, same thing. that will go under derivatives. they don't have regulations for this. they are looking and saying they're using existing law and on the enforcement fees, if they see something that they inc. is bad behavior they will deal with it swiftly. bitcoin,en it comes to the fcc is in a catch-22? >> exactly. it is moving so rapidly and so many people are adopting it, it hit a recent high. know, theyreally don't have the resources to deal with it. on one hand they want to spur innovation and growth. they will keep coming back to

the core mission of protecting the retail investor. this will be the case at the fcc. you will see a lot of education in the next year, a few enforcement actions. both regulators have shown they are willing to come in and stop something. it will take a lot of time. , they example, the cftc allowed one group to be a a derivative-- clearing organization, it took them two years to educate. to blocken it comes chain technology, what is the regulator he outlook? what does it mean for banks? >> the federal reserve and the the regulators in the united states will take a look at block chain and it will fall under their payment systems methodologies. they will use existing regulations. the thing with the federal reserve and the occ in terms of

block chain is you will not see it separated out. you see the examination authorities of both regulators, saying, we want to make sure this is ok. of how big does it get. a lot of people are saying, we want to build block chain. if you start building a ledger that is handling $5 billion in payments, that is when the federal reserve will step in. if it is a small ledger, they will be ok with it. once it gets larger that is when the examiners will take a look. asra: i want to turn briefly well to the treasury report, a separate issue. one thing that seems to have got wall street fluttering are the mortgage provisions. >> this is the second of four. there is a piece in there about securities, talking about the risk retention rule. because thereant

wasn't a lot of chatter in washington to deal with this rule. you hear about it on wall street but not in washington. it suggest the regulators should look at the risk retention rule. this requires sponsors to retain 5% on their books. it is a big deal. is $12 billion to $60 billion in capital. one specific portion of the report we think is something that is likely to happen, you may see a carve out for loan obligations. they have a different story to tell than they do on the cdo side. it would not be surprising to see the federal reserve take a look at this this year. nejra: we will keep an eye on this from the fed's perspective. thank you so much. that is it for this edition of bloomberg markets, rules and returns. next time we speak to exit a xavier. you can drop us in email on

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