♪ tear, thef's on a blackrock ceo seeing huge inflows in part because of mifid 2. >> we look at it as a net positive. mifid ii is creating more transparency. nejra: bitcoin boom or bust. we discuss the future of cryptocurrencies and if regulators can work fast enough to effectively role in the

changing marketplace. beyond mifid ii, after it goes into place, what does the buy side have to fear, 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 market participants shaping and reacting to a new generation of rules. let's kick this show off with etf's. passive investments are getting a boost in europe. mifid ii is expected to increase flows from retail investors in the u.s. the fiduciary duty and new guidelines will raise their exposure to etf's. to talk about the impact that mifid ii will have on etf's in coen atsteven blackrock. stephen, so great to have you on the program. i have brand-new hot off the press intelligence research

saying europe etf's may double to $2 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 simply over-the-counter? stephen: you 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.

underlying both a lot of it is about transparency if we think . about retail investors, greater transparency of costs is changing the portfolios that they are thinking about owning in the products they own within that. etf's benefit significantly. we have seen that with the fiduciary rules you mentioned in the u.s. over the last year we . on the trading side, one thing that mifid 1 didn't do was include etf's in trade reporting. so a lot of the trading in etf's is 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. these rules will shift to creating more transparency. i think that will create more confidence in investors understanding that there is a lot of volume in these products and therefore they can think more broadly about how to use

them. nejra: i'm wondering if confidence comes with competition. blackrock dominating the etf market in europe. you control five times the assets of your nearest rival. do you them. expect more competition? does that concern you at all? do you think you will be across all etf asset classes? will see more people looking at the etf market as it grows. we think 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 niche players. you said that even though mifid ii 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? >> when you look at the rules, there are certain rules that can have an immediate impact, the transparency from the trading side we will start to see in 2018 and accelerated from there.

there are other parts of the rules, around the retail wealth and distribution rules that will start to kick in around transparency in 2018. again, i think the business models take time to change. as those business models 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? >> i think a lot of it is around education. i think there is a lot of education that needs to be done in europe for and investors about what an etf is and the role it can play in a portfolio. the media will play an important role within that as well. in terms of helping investors think through what is going to get them 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. i think they can play a very

positive role. education to me is critical for people embracing the value of the product. nejra: the media will ask the difficult questions. at the moment, regulators aren't seeing etf's in europe as a risk . what could make the industry a victim of its own success to the point that regulators do start to be concerned apart from growth? >> i think the duty of us as as etf providers is to ensure that the products we create are suitable for investors. i think that that is something that is very much on us. we have a duty to continue to educate regulators. as we go through these changes, as the industry grows and industry changes, and you see the rise of new types of investing, such as factor investing through etf's, it is important we are regulating -- sorry, educating the regulars in a way that we are educating clients. we have an ongoing 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. we have talked about the fact that the landscape is changing in europe. it is very different when you look at europe and the u.s. in terms of demand for etf's for retail versus institutional. in europe, do you see mifid ii boosting retail and retail institutional demand in equal measure? >> i think it will increase both. if you think about in terms of those two pieces to mifid ii around the distributor and , one transparency costs, that is focused on the retail and retail wealth market. i think that the trading cost transparency and trade reporting really boosts the institutional uptake. if you look at the u.s., you have seen that over the last couple of years. i think 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

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

♪ nejra: welcome back to bloomberg markets rules and , returns. now 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 $2500 an hour on 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. mifid ii will 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 and markets authority. so what else should the buy side be looking too. joining us now, sean, great to have you on the program. thank you for joining us. welcome. you said that after mifid ii we are done with global financial shift regulations and the

will now be more towards policy debates. what did you mean by that? last big piece of 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 tweaked. that is the big adjustment the buy side is facing. nejra: what policy specifically are we looking at? >> i think one of the big next ones year globally will be the etf industry. the tremendous growth of the industry in the last 10 years has knock gone unnoticed by policymakers. i think that they will take a step back and look at the framework and see what needs to be changed, if anything. this year, the central bank of ireland has published a paper on etf's, another one expected, the 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

from here, that there is even more potential from the growth we have already had. what exactly do you think regulators might start looking at? >> i think in europe, guidance around etf's in 2012, if you look at the work program, they are going to take a second look at that guidance. what they are looking at, if you look at the etf industry growth trajectory, ensuring the regulatory framework is best suited for the industry. quite honestly, the industry would welcome this review. it is not about hampering growth, it is more making sure that the regulations are tailored to the specificities of the etf product. nejra: how should asset managers industry look at this? is that positive? >> i think it 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. i think certainly a review of the etf structures and framework would allow active managers to work with regulators on how active strategies can fit within an etf construct. nejra: for the buy side, on the regulatory front, there is a lot to look at. let's talk about the fiduciary duty. we talked about raising exposure to etf's. moving away from etf's, some parts of the fiduciary rule took effect in this year. until july postponed 2019. it is seen as having the biggest impact on brokers and insurance agents. more broadly, will it be a big blow to active management and a boost for passive? >> i think it certainly will be a headwind for active managers. theconcern is that with fiduciary rule 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

cheaper, low-cost index products over active products. so i think it creates another headwind on the active management side, which 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. also, 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 regulatory burdens will be eased? >> the fcc a few years ago introduce this derivatives rule, which was really designed to address the embedded leverage within u.s. mutual funds. the rule received a chilly reception from the industry and it has been on hold since then. with the change in leadership 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. to meet some of the concerns that it was overly prescriptive.

nejra: other reforms in europe in particular for the asset management industry that the buy side needs to get their head around, how far along are they from doing that? >> the big item for asset managers, closely tied to brexit , is this 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, new york, 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? >> it is a good question.

i think that 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 is probably going to see pressure on fees that it hasn't seen before. i think there will be more competition around, for investors and that will be a good thing. nejra: sean, thank you so much. head of market and regulatory intelligence, great to have you on the program. coming up, we talk cryptocurrency, bitcoin so is above $5,000 for the first time. we get the latest from washington. this is bloomberg. ♪

♪ nejra: welcome back to bloomberg markets, rules and returns. there are two side to do introducing new regulation. on 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. >> what is good for the market is to make sure you don't limit participants to the marketplace. i think liquidity is critically important. when you limit participation in when things are like they are right now with low volatility and not much is going on, in times of distress, you want to make sure everyone is in the marketplace. >> dodd-frank or -- >> it would go to two the the volcker act. the way it was written, it was ill advised at best. i did not support that. i believe the banks should be allowed to prop 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. so they can prop trade in u.s.

treasuries on the cash side and future side, but you cannot 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 states, now we 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. so we are really starting to move forward in that direction. i'm not sure if that is because of the laws or the efficiencies in the pools of liquidity, but my 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 because of the stuff you mentioned, stress will come to the marketplace and you want those people in there. nejra: let's talk bitcoin as it spiked above $5,000 for the first time. the ceo of ubs has said the world's wealthiest individuals are staying on the sideline when it comes to cryptocurrencies. the comments were made in an exclusive interview with bloomberg. >> people are curious that they are willing to invest.

i don't think there is any meaningful desire for high net worth individuals to take big bets on this phenomenon. nejra: let's keep the conversation on cryptocurrencies and how regulators in the u.s. are and aren't keeping up with the new technological advances. nathan dean government analyst , a for bloomberg intelligence joins us now. he is in washington. nathan, great to see you. thanks for joining us. as we just heard, that coin surging to record after record, bitcoin has surged to record after record, china central bank has stepped up regulations on digital currencies. how u.s. regulators, i'm wondering, block chain, are they are unregulated, an asset class apart from the financial system? >> bitcoin and block chain are mostly unregulated. what the regulators are doing is they are using existing regulations and existing law to deal with it. so if you are with the fcc for

example, and we are this with the initial coin offerings, 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. 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 think is bad behavior they will deal with it swiftly. nejra: when it comes to bitcoin, the fcc is in a catch-22? >> exactly. it is moving so rapidly and so many people are adopting this. we just saw it hit a recent high. they don't really know, they don't have the resources to deal with it. on one hand they want to spur innovation and growth. but i think they are going to keep coming back to the core mission of protecting the retail investor.

certainly this will be the case at the fcc. next year, you will see a lot of education in the next year, a couple of enforcement actions. both regulators have shown they are willing to come in and stop something. it is just going to take a lot of time. for an example, the cftc, they allowedd that they have one group to be a derivative clearing organization for bitcoin. it took them two years to educate them. nejra: when it comes to block chain technology, what is the regulator he outlook? does block chain become a financial market utility? what does it mean for banks? >> the federal reserve and the occ which are the regulators in the united states will take a look at block chain and it will fall under their payment systems methodologies. again, they will use existing regulations. the thing with the federal

reserve from the occ specifically when it comes to block chain, i don't think you will not see it separated out. you see the examination authorities of both regulators, saying, we want to make sure this is ok. it is a function 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 and occ is going to 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. nejra: i want to turn briefly as well to the treasury report, a separate issue. one thing that seems to have got wall street fluttering are the mortgage provisions. >> that's right. the treasury report, this is the second of four. there is a piece in there about securities, specifically talking about the risk retention rule. this is important because there wasn't a lot of chatter in washington to deal with this

rule. you hear about it on wall street , not so much here in washington. what the report suggests is that the regulators should look at the risk retention rule. this requires sponsors to retain 5% on their books. it is a big deal. that is about $12 billion to $16 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. -- i'm sorry, next 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. if you have questions, comments, or thoughts on regulation, you

can drop us in email on bloomberg.com. this is bloomberg. ♪