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The recent turmoil in global financial markets is reshaping the financial services industry. To gauge the likely fallout (and upside), the editors of the Journal of Indexes spoke with leading experts in the field of indexing, ETFs and derivatives to find out how the credit crisis is impacting their businesses.
 Kathleen Moriarty, partner; Katten Muchin Rosenman LLP
Journal of Indexes (JOI): How has the credit crisis and stock market fallout affected the environment for exchange-traded products?
Kathleen Moriarty (Moriarty): To the extent that it's affected it one way or the other, it's probably affected it positively such that people who want to be able to trade a mutual fund or a pooled product at a particular moment or at a particular price in a volatile environment are probably more drawn to an ETF than a mutual fund. With an ETF, you have access to up-to-the-minute pricing and you can place limit orders and various other kinds of orders that you cannot do with a mutual fund. I think that drove some investors out of the mutual fund arena and into the ETF arena.
From a regulatory point of view, nothing to my knowledge is being changed right now. We'll have to wait and see in the broader arena whether things change, because depending on what changes, that may flow down to include the ETF and mutual fund space. For instance, if there's a decision either by some kind of act of Congress or some other regulatory mandate that there be more disclosure about, say, credit default swaps or other kinds of instruments, that might affect any ETF or mutual fund that holds those instruments. But nothing has happened per se in the ETF space as a direct result of the credit crisis.
JOI: Have your clients' concerns and issues changed?
Moriarty: I think some clients and some investors have realized what many have said all along, which is that in this industry, there are a variety of products structured in different ways, and some people have been less-than-careful about paying attention to the differences. There are people who have finally begun to appreciate the differences between an exchange-traded note, which is a debt instrument backed by the credit of the issuer, and an ETF, which is a share of an undivided interest in a pool of securities. You have different credit risks, and I think especially with people who were exposed to the credit risks of firms that had major problems or didn't survive—like Lehman Brothers—they have learned firsthand the difference between an ETN and an exchange-share backed by a pool of underlying equity assets.
JOI: Has the pipeline changed, and what can we expect to see in terms of products and regulations in the next year or so?
Moriarty: I think the pipeline has stalled a little. I think there are people out there who are waiting in the wings with product, but they're having a hard time finding seed money for initial deposits, or they're having trouble finding venture players or institutional investors who want to back a new ETF start-up because credit is just tight everywhere. I think even major players who don't need capital to start up are reassessing which of their products ought to be launched in the next six months to a year, given the environment we're in right now. Things that might have been launched six months ago might not be launched right now. My bet is you'll see more debt products and probably principal-protected products.
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