Matthew Legg: Hi, my name's Matthew Legg and I'm the Global Head of Delta One and ETF Sales.

Ciaran Fitzpatrick: Hi, I'm Ciaran Fitzpatrick, and I'm the Global Head of ETF Product at JP Morgan Security Services.

Matthew Legg: Ciaran, it's been a pleasure working with you. Can you tell me a little bit about your career ahead of getting to JP Morgan?

Ciaran Fitzpatrick: Yeah, absolutely. In the financial services industry just over 22 years. Started out with Investors Bank and Trust, which was a relatively small organization. Obviously an American company, but I'm based in Dublin, so came straight out of university and started there 2003. That company was then bought out by State Street in 2007, so I changed job without having to change job. I was with State Street for 17 years. I decided it was a great opportunity, came up at JP Morgan to take on the global role from an ETF perspective. So yeah, no, it's been a phenomenal 13 months. I suspect your term in the organization has been a bit longer than mine, so what brought you to the firm?

Matthew Legg: So yeah, it has. I've been at JP for eight years now. I was 10 years at another bank before that. My core role is Delta One, and that's all synthetic combinations of equities. So ETFs are just one part of that. But what's been interesting, and I mean of course you've had a front row seat to this, but it's been interesting over the last 10 years, the external demand for time spent on the ETF portion of the business, the volumes going through, the flows, the focus internally and externally in ETFs have just become so big that it's become a standalone role in itself. So what started as a Delta One role with ETFs as a component has now become Delta One and ETFs.

Ciaran Fitzpatrick: What areas do you think have been, over the past decade, the growth areas of exchange traded funds, and maybe even what is an exchange traded fund?

Matthew Legg: Well, yeah, I mean to start out an exchange traded fund is like any other fund except for, and very obviously by its name, it can be traded on the exchange, so it has intraday liquidity. It can be market made or it is market made and it can be accessed throughout the day on a live public exchange. So whilst that is a simple difference, it makes quite a significant difference for what it could be used for, the ecosystem, the risks around it, and lots of other things, which is what really differentiates it as a product.

Ciaran Fitzpatrick: And from a product, it's only what, 35 years old in and around?

Matthew Legg: I guess in the US and then less in Europe.

Ciaran Fitzpatrick: Yeah, Europe was just 25 years celebrated this year. So 2000 was the first product launched. If you look at know an ETF as a way to buy the return on, is it 50, 100, 200, 1,000 stocks or bonds by placing one trade. So the concept itself sounds like someone should have come up with a long time before that, but-

Matthew Legg: It makes a lot of sense.

Ciaran Fitzpatrick: Yeah, yeah. That grow to the product from '90s, 2000s, it started out passive, then we're seeing active come into it and different variations of that, be it thematic. What's your experience been through that and the different product sets? Where do you think the biggest growth has been and will continue to be?

Matthew Legg: Well, I mean obviously you mentioned it there, The growth in passive was the core start of... That's when the ETF product really became big, and what are we now $17 trillion, over a trillion inactive maybe nearly a trillion and a half.

Ciaran Fitzpatrick: Nearly 1.5, yeah.

Matthew Legg: But that passive component is obviously huge, and I feel comfortable saying we've got to a point where for passive exposure, ETF is wrapper of choice. You can see the outflows from passive mutual funds into passive ETFs. Very consistent, very significant for a good number of years now. So I feel like within that passive space, the market has developed, it's become super efficient, it's provided really low cost access to passive returns for a broad range of investors. And that's been a really interesting portion of the journey.

But where things have really taken off is this expansion into active. And obviously you can break down the two different regions. I think it has happened in the US, and obviously there's so much more to go, but it has occurred. And then we're a little bit more at the start of that journey in Europe, and obviously a lot of the stuff that we worked on together is just a huge number of issuers, whether they be European mutual fund issuers or whether they be US ETF issuers looking to start up that platform, in Europe, a UCITS wrapper. But the huge wave of those issuers coming to market and the huge expansion in the type of exposures that people are putting into the ETF wrapper, that's what's really been interesting for me in the last few years.

Ciaran Fitzpatrick: Yeah, and that's what I was saying earlier about the product just evolves continuously. Passive was probably a 15, 20 year journey of the market growing and growing well into double digits every year. You're talking 10, 15 up to I think even 2024, was it 24, 25% of growth from a European perspective. But yeah, no, I kind of agree with the view. Passive, it's still... Of that 16 trillion, it's a majority of it, and that will continue to be. But what's really excited me now in the latest evolution, so we've had the passive, then we had smart beta and thematic is... Not that it ever went away, but it's starting to make a return as well. We're seeing a lot of growth in thematic products and you're probably seeing them from a trading perspective.

But active is really bringing the opportunity for... It's that continuation of the mutual fund, but in a different wrapper. Look, I don't see an ETF as being a different asset class. It's nearly a piece of technology. It's a way to offer your strategy in a different structure, and that's what we're seeing active managers doing. I do find it funny, it's gone from... It was always the active to passive debate and now it's active to active, but just a different wrapper. But it's definitely a way for new issuers or very successful mutual fund managers to offer their product in a different distribution category, by able to offer it on exchange. But I think that's the managers we're actually seeing coming to us now.

Matthew Legg: And to a different audience.

Ciaran Fitzpatrick: Yeah, well, exactly, yeah.

Matthew Legg: One of the most common discussions we have with issuers is their desire to market to or be able to market to that whole new generation of wealth coming through.

Ciaran Fitzpatrick: Yeah, it's not the whole concept of cannibalization of assets. Well, if I launch an ETF of the same strategy, will I actually end up losing investors or am I moving investors out of one product into the other? But at worst, that's a defensive play more than anything else. If you don't have an ETF strategy, and we're seeing the flows... I mean if you look at the ETF flows in Europe in 2023, I think it was, there was probably net new inflows into ETFs of about 160, 170 billion. Whereas what went out of mutual funds was that and more, and the graphs are nearly offsetting. It's not new money, it's money coming from one product into the other. So it's definitely showing that having an ETF strategy is number one, protection, but also hitting a different distribution channel and also expanding the target for your product.

Matthew Legg: Yeah, I think the ability to access the retail audience is... Clearly when you talk about US and ETFs, you naturally put together that... You think about retail.

Ciaran Fitzpatrick: Yeah, absolutely.

Matthew Legg: And the way retail has really embraced the model portfolios and the huge scale of assets that track those, I mean, honestly, it always blows my mind when I hear that the raw figures for that segment of the market. In the multi trillions and expected to go 6 trillion now, expected to go to 10 trillion by... Well, it depends on who you ask, but 2030, something like that. And they're constant increase in use of ETFs, it's such a huge driver for for AUM into the ETF wrapper. And then thinking about Europe, we're just starting to see that happen with the digital platforms now and the technology, you mentioned technology earlier, the technology making it really simple for retail to access these funds, and the simpler that becomes, the more you reduce those hurdles.

Ciaran Fitzpatrick: Yeah, we've heard that for the retail element of the US, the split is probably, what, 60 retail, 40 institutional, whereas Europe's probably 85 institutional, 15 retail, something like that. So we've heard there's been different opportunities for when will the retail investment come? It was always said to be education, you need to educate investors. But I think I read something in the region, though, like $11 trillion or euros sitting in deposit accounts across the European countries, so earning next to no interest. If you could even tap into like 5, 10% of that, the industry just continues to grow, people have a better product. But I think regulation has had a go with method two as well, always trying to make sure retro sessions were removed and brokers were offering the best product to the end investor. And I think not a lot of good probably come out of COVID, but one good thing was people were investing the money that they were actually building up.

And we saw that in the likes of Germany, Switzerland, France, a lot of those countries, they were actually opening savings plans accounts, and I think renaming or the rebranding of model portfolios to savings accounts sits a little bit easier with the retail investors and they understand how that product will work. And I think there's been significant flow. As you say, we've seen a lot of the retail brokers actually coming into play.

Matthew Legg: It's really driving net new asset gains for issuers these days. We're hearing that.

Ciaran Fitzpatrick: And any of the issuers we talked on the security servicing side, be it a new issuer or very established, they either have a platform strategy, how they'll engage with platforms, or we explain to them you need to have it nowadays, and it really is really starting to take off, which just goes back to what I was saying. You had your passive, you had your active, there was the smart beta products, and now we just have this whole new range of investors starting to come to the product.

Matthew Legg: And we're definitely seeing an expansion of the strategies that get incorporated into an ETF. And I think a lot of the industry is very focused on that thinking. There's a huge growth in this as a wrapper and a technology. There's huge asset inflows. What is the right strategy to fit into an ETF? And that comes back to that transparency question as well, so that's a really common question within ETFs, of does a semi-transparent or non-transparent wrapper work within ETFs?

Ciaran Fitzpatrick: And that's pretty the active and passive, how far do you push into active? So the success of passive products has been around full transparency, daily reporting, and the optionality exists in the US, to have semi-transparent, and it's got like 15, 16 billion of assets. But some products have done well, but in the grand scheme of things of over 10 trillion of assets in the US. But I think we did see the Luxembourg regulator recently changing their stance on transparency. It was daily for the European ETFs or Luxembourg domicile. They've then shifted to say, "Okay, you can offer it on a monthly lag." And then the Central Bank of Ireland reacted by saying, "Okay, you can have transparency on a quarterly lag." But it's not taking transparency away from the capital market. And that's I think one of the most important part. How can you price a product or what are the key elements to pricing an ETF that you need? And if you take the transparency of the portfolio away, obviously makes your job and your team's job infinitely more difficult.

Matthew Legg: Well, if you ask me that question of what do you need, the answer would be transparency. So if you take that away from the AP, just by definition we're having to estimate and guess and proxy hedge, and that's going to widen spreads and it's going to increase the cost of access and just the transactional cost of accessing those funds. The great thing, as you said, with the European semi-transparent model is that the AP service, whichever select group of APs the issuer is happy to have as an AP on that product and provide transparency to, can see what's in those ETFs, which means we can price them exactly like we would fully transparent products. It's just the external reporting which is delayed, as you said, and that stops the concern for some of these more concentrated high IP strategies that there may be IP leakage, that if they're holding concentrated or less liquid positions, that when they start to sell that will be signaled to the market.

They get protection from that. And I think from a lot of discussions with a lot of asset managers, it just increases hugely the spectrum of potential strategies that they might consider putting in an ETF. And I think for Europe, that's going to be really important. And I think that's one of the areas... So often we look at the US and we say... We can see because it's just a more mature market, we can often see trends that are going to come to Europe because they've realized in the US. This is one where there might be a slight difference, and I think just based on the fund requirements in the US, the restrictions on that same process, so who is able to see the composition and who isn't, and also the preference of those model portfolios that we mentioned earlier that I think highly value transparency. That's slightly different in Europe.

And it comes back to a common question that people ask, you mentioned it already, the tax advantage of US ETFs. That's often cited as the core reason why assets have grown so much. But then when we look at... And you mentioned there's some tax advantages in Europe, but I think we'd agree it's not the same scale of advantage. But then when you look at the growth in Europe, it's very similar on a smaller scale to the growth of the US. So do you have views on why ETFs are such a popular app outside of that tax advantage, because-

Ciaran Fitzpatrick: Yeah, I think the tax was probably a starting point. And I think we're seeing that on the addition of the share classes now to mutual funds as well in the US, which I can touch on in a second. But I think the availability of the product is another piece. And we touched on that. How do you buy an ETF? Well now you can just buy it on your phone, there's really low commissions on it. You're not buying into strategies that you don't understand by and large. And this is where that kind of discussion around, well, what's the right asset to have in an ETF know? Is it just equities, is it bonds? Is it a combination like the multi-asset strategies?

And now we're seeing at a very initial phase of managers looking to put private assets into ETFs, and is that a stretch too far? But honestly, I think the availability of the product, the transparency of it, I think as I said earlier, the ability to get a return of multiple securities by placing one trade is huge. And then if you look at the institutions, ETFs are being used as building blocks in model portfolios. They're being held in mutual funds. They're being held in actually hedge funds, which I saw some pretty impressive numbers recently. I wasn't aware that that amount of hedge funds were actually holding ETFs as well.

Matthew Legg: Particularly in fixed income.

Ciaran Fitzpatrick: Yeah, yeah.

Matthew Legg: Seeing a lot of use in Europe in fixed income. Obviously in the US, heavy users of ETFs.

Ciaran Fitzpatrick: So there's another area starting to grow, and I've even seen to get exposure to markets like India as opposed to a future just by the ETF. So it's...

Matthew Legg: Yeah, market access.

Ciaran Fitzpatrick: Yeah, exactly. And then to go on a bit more of a nuanced area, you've got crypto products. There's a number of crypto products in Europe. And while, again, are they right for retail or institutional? Well, obviously from a usage perspective, you can't hold that asset class, so they're not a usage, but they're in a debt structure, so they're issued as ETPs. But again, it's a way of getting access to crypto without actually having to hold the asset itself. So yeah, I think the popularity is going to continue to increase going back to what I said earlier. Every single twist in the market seems to have some element of the ETF associated with it, which is... As I said, it's been great for the industry and why I've stayed and worked in that kind of product class for the significant portion of my career to date.

Matthew Legg: Yeah, I mean, you mentioned the operational advantages. One of the things that's been really interesting to observe over the whole time that I've worked across all these different Delta One products is the electronification of each of those markets, the extent to which all of the transactions, all of the operational processes naturally need to be scaled, they need to be systematized. And the ETF fits really well into that new more technology-dependent execution structure. So if you think about when we've had all these different... Obviously there's constant change in regulations, restrictions in what you can hold, et cetera. We build all of that and our investors build all of that. Also, our clients build all of that into their, that OMSs and their EMSs, all the controls sit at that platform level.

So having something that fits into that ecosystem becomes vital versus... And we've seen that across all the swap businesses and across futures and across ETFs as well. So think about that versus an allocation to a mutual fund which is not executed or managed within that infrastructure. You can see why it becomes so important for institutions to build it into these scaled trading platforms that they have.

Ciaran Fitzpatrick: And I think that when you look at the... I think there's 60 odd submissions in with the SEC to add ETF share classes of mutual funds. And there's a number of reasons I think why they're doing that as well, which is to put an ETF slant on the successful mutual funds. I think it slowed down the ETF conversion or the mutual fund conversion into ETFs to a lot of managers are now taking a step back and saying, "Well, if I can just add a share class to my structure, my mutual fund structure, that will give me the benefit of an ETF."

Matthew Legg: Is it as simple as that?

Ciaran Fitzpatrick: Well, I've differing views on it, but yeah, my view is it certainly isn't that simple, because the last 30 years of developing an ETF infrastructure has been around, yes, the components of a mutual fund, but then you got to build in some of the key aspects, which are capital markets, absolutely critical for a growth business for an ETF and what's capital markets.

Matthew Legg: And often overlooked.

Ciaran Fitzpatrick: Yeah, well certainly the more and more is mutual fund managers coming into this space. Capital markets is not at the forefront. It's how do I get a product live. And as I've seen, be it the US, be it Australia, AIPAC, Europe, you can have a really good concept for an ETF and launch the strategy. But I genuinely believe the issuer needs to own the capital markets function, which is, as I see it, a bit of a multifunctional role within ETFs. It's knowing how the operations work, it's monitoring bid ask spreads in the primary and secretary market and making sure that market makers are quoting what they should be doing. It's supporting the sales effort with your sales team with that knowledge they have of the product. It's working with your custodian as well.

And then it's really holding the market accountable to make sure that spreads are in line. And obviously you sit on the other side of that where you're dealing... I'm looking at it from a custodian and service provider perspective, but you're on the other side, from an AP perspective. How do you see the importance of capital markets and do I overrate it or... It's becoming quite commoditized at the moment, we're seeing all these new issuers coming to the market, yet not enough capital markets resources seems to be the case.

Matthew Legg: I mean I think it's crucial. So as you mentioned, we sit on the other side from you guys of that capital markets team. So we're the liquidity provider to the street and we're engaging with the capital markets team in terms of getting access to the funds that they're acting as capital markets for. And in terms of understanding exactly what's in those funds, that can take a whole range of different functions. But our ability to understand real time what is in those funds is absolutely crucial. Our ability to interact... I mean we're dealing on the other side. So this is the crux of where it becomes different to a mutual fund. We're dealing in those funds with investors real time in the market, so we need to have instant understanding and access of any nuances around that and the capital markets team provide that.

Ciaran Fitzpatrick: Can't just wait until the end of the day to get an answer.

Matthew Legg: We can't just wait until the end of the day, exactly. It's too late at that point. The capital markets team will regularly take a leading role in fixed income in the negotiated basket or managing that negotiation process, and they're the link through to the PMs who are managing the fund. So of course parts of the roles can be managed by the different functions within the issuer, but I think if you do that, it becomes very challenging to make the product function well. And at the end of the day, ETFs, up until this point has been... It's an extremely competitive market. Where in passive space it's much more commoditized. So the difference in the ETFs and the way that they function and the spreads at which investors can access become a really key part of the success of that ETF. Clearly that's going to carry on into active. There'll be more differentiation because they'll be selling the IP, but to the same extent, people will anticipate that they can have the same experience, the same positive experience that have passive and active in capital markets is really key for that.

Ciaran Fitzpatrick: I think the IP point you made there is quite important as well. And I think when it is coming to active, you get a lot of high conviction strategies or concentrated active mutual funds and issuers or managers are talking to us and saying, "Is that what you're seeing in an active product?" And it's typically not. A lot of the active managers launching ETFs, you may call it massive plus or it's not high conviction active, but what they are doing is they're taking a flagship strategy that they would have in the active space and they maybe water it down a little bit, so they optimize the portfolio, they're not holding as many securities. They might drop some of the derivatives and more complex instruments out of it, although that's changing a little bit as well. We've seen that with CLO products and the buffered option strategies in the US, like the ETF is getting more and more complicated.

Matthew Legg: And in Europe, nonlinear products in Europe are extremely popular now as well.

Ciaran Fitzpatrick: But that's where that expertise and the ETF component comes with cap markets. Another one I think is sales. I think you do need dedicated salespeople selling your ETFs, and I think the US and Europe and Australia differ. I think Europe... The US is largely one market. North America in general, it's one market. Everyone understands the function of it. Whereas Europe is very fragmented. You've got 26 different market exchanges, there's different investor and buyer behavior in each one. That means you typically need sales experts for ETFs in the region you're trying to target. And I think a good thing we've seen with ETFs, it's not a scatter gun approach anymore to selling them. It's looking at the target market in that country, let's say, and does your product fit? And you'll only list and distribute if it suits that market. You're not just going to list it... Because it comes with costs and you got to keep the cost of ownership down as well and a launch of the product.

Matthew Legg: I think to that point on the distribution, one of the really interesting trends we've seen from issuers is I think the drive to amalgamate or to combine the distribution forces that they had for their mutual fund business with their ETF business. And they're kind of doing that across the organization to try to make those two sit together. And I think the end goal of that is what we talked about right at the start, which is that they create IP, they create the strategies, and then they have different distribution wrappers. So I think within that team you need that ETF based expertise in terms of how to distribute as well as the mutual fund. But I do think it's interesting the way the clients that we speak to are trying to pull that all together so that they have a single sales force distributing essentially wrapper agnostic. And if they do, then we really get to the position where it just becomes the wrapper.

Ciaran Fitzpatrick: That just triggers something with me, and it was something I've seen since I've joined JP Morgan, was the capabilities across the firm to offer services to an ETF issuer is... To me it was one of the big drivers why I joined the company. I've come from a custodian and administration background and really focused on that area of the business, but even before I joined JP Morgan, I looked at, well, we've got a markets business, we've got security services, custody, we've got program trading, we've got an AP desk, we have a Delta One desk, we've got a really good FX capabilities and a lot of restricted markets and developed markets. And it was like, how can we hang that together?

And it was just when you were talking about new managers coming to the market, having seen some of the detail and expertise that you have in your... How do you support new managers coming to the market? Obviously on my side of security servicing, it's how do you service the fund? How do you structure it? But from what you're seeing on the market side, what level of support are you providing or what do you think the key offering you have for new issuers is?

Matthew Legg: There's a huge... I think we mentioned before, the key differentiator between the ETF and the mutual fund is really that access to market. So what we sometimes find with new issuers coming to market is that there is a big educational component, as in they really want to consume all the information around the market structure, how the market operates, and how all of those processes occur. So for the really newer managers that are extremely familiar with mutual fund platform, just that component-

Ciaran Fitzpatrick: I love that conversation, isn't it? It's like...

Matthew Legg: Right from the start.

Ciaran Fitzpatrick: Yeah, it's breaking down their understanding of what they think the ETF does to make sure they do understand it, and then you've got the regional nuances as well.

Matthew Legg: Exactly. And there's so much to that component. So in more tangible terms, what are we providing? Well, we will be an AP, so the ETF will need a range of APs. So they need people who are providing liquidity. When investors look for quotes on the... They want to access the fund, they want to buy the fund, they're going to go out to APs. And if people are nonresponsive, if the fund doesn't have sufficient APs, or if the APs aren't pricing the products, they won't get anything back. And that's obviously a really bad experience for the investor. So they need people pricing their funds and we obviously need that. They'll need on-screen market making, so we can guide them in the right direction around what they need, what level of spreads investors are going to expect, what time on screen is required, et cetera. Commonly they'll meet seed, seed capital. So that's a super common request we get. Now seed capital comes at a cost and it's becoming an increasingly finite resource because just the sheer scale and number-

Ciaran Fitzpatrick: That's just seed to get a new ETF off the ground, right?

Matthew Legg: Yeah, exactly. And each fund needs to launch with some assets. And then what is interesting about the ETF market, and is probably the case for most fund asset building businesses, but obviously as the fund gets bigger in terms of AUM, the amount that investors can invest becomes bigger, because many of them would be restricted in terms of a percentage of fund. So that seed helps them immediately access a bigger range of clients and grow assets. Another portion is on distribution. We spoke before about the nuances of the European market. If a lot of the new managers maybe coming over from the US, the European market may be different to them and as you said, much more fragmented, or they're maybe from mutual fund background. So understanding who is buying ETFs and where and what client type, what the regional differences are will help with that.

Ciaran Fitzpatrick: When I was sitting down with you and your team and saw some of that data, I've used the word gold dust quite a lot when we talk about it, but from looking at the capabilities of the firm, that's just one of the key areas. I think on your side of the business, and on my side, we've very much gone all in on ETFs. There's a huge focus from the top of the firm to make sure that we can service our clients and it's building strategic partnerships. We've got a very significant investment budget. We're at the start of a three-year journey on the security servicing side, and a large part of what I focused on when I joined and will continue to do is making it sure it's not just security services but it's markets with yourselves. It's the program trading team that sits right next to you.

I was talking to the sec-lending team about what opportunities we have there, and currency hedging, we've got a really good platform. The overall package, and we're seeing this more and more in the industry, is asset managers and issuers coming to their partner looking for a strategic partnership. Not just custody administration anymore, but as you said, the access to capital to get a product off the line is huge. And then expertise across the globe at servicing the products. But to be able to offer nearly the full package and then the ETF issuer themselves can focus on the cap markets, the distribution, and the sales, and the fact that we're catering for everything. That's more gold dust. So I think that's been a huge benefit and a huge way to expand our offering.

Matthew Legg: So just thinking on your side of the fence, the asset servicing side, how different is it to look after an ETF platform or service an ETF platform versus a mutual fund platform? Is there a significant... Have you had to build significant technology, other significant differences? Your side in terms of what you provide?

Ciaran Fitzpatrick: I've said it for years, it's people, it's experience, and it's technology, and until you can wrap the three of them together, there's going to be a gap. And I think that's... If you look at where we focused, we brought people in, we've a significant investment in technology and we've got good experience. And where do I mean on top of the mutual fund. So you've got your mutual fund product, an ETF, in the US it's a '40 Act, in Europe it's a UCITS. So it's still in the same umbrella. That's what I was saying earlier on. It's not a separate asset class. But then it's the technology to produce the reporting we were talking about to allow you to price in the secondary market. It's those portfolio composition files. Being able to build that ETF specific, you need to produce forward looking reporting. What does the fund look like tomorrow? That's effectively what we construct.

And it's being able to link that. So we've obviously got global proprietary technology that we use, so we control our own destiny when it comes to our capability in that space. But yeah, there's a huge step up from just mutual fund servicing to then adding the ETF layer on top of it. So what I always focus on is use the depth of expertise and fund accounting and custody and depository, et cetera, transfer agency, and layer the ETF expertise on top of that. So that's the people and expertise. And then the investment of technology you just have to have. And we're seeing that become more and more competitive. And I think one of the big shifts from passive to active, active is bringing more complex assets into the products, as you said. The nonlinear structures.

We just launched a CLO product, the first passive CLO in Ireland. We've launched a number of buffered strategies in the US which are holding options which have that downside protection, which have been hugely popular. And servicing all these complex assets within an ETF, it really pushes on the technology and that's why you just got to be looking around corners all the time for what you need to do next. So it's not just what we do, it's we work with obviously the ETF market, the overall ecosystem. And it's that ETF element of it, that talking to authorized participants, talking to legal firms, talking to the settlement depositories, the Euroclears, Clearstreams, et cetera, and understanding what they're doing to make sure that our systems connect with theirs. And also that our clients have an understanding. I'm big into best practice solutions, not having bespoke all over the place because if you build bespoke for one client and then for another one, no one's leveraging the overall capability, you're doing something different each time. I very much like to focus on having a best practice solution that's global, but with regional nuances.

Matthew Legg: I mean, we've already seen the importance of scale in the market just aside from the actual quantity of assets and the turnover that you're servicing. But now this huge increase in the issuers coming to market, whether it was passive, it was dominated by obviously a range of very large players. In active that just opens up to so many more and we're seeing that scale requirement and almost some bottlenecking in so many portions of the ecosystem. So on one hand I look at the whole industry and the way everything is connected, how you described the way we're connected with all the different components of the ecosystem and the level of automation that's been built into our pricing and into everything we do, the consumption of the PCS and the calculations of fair value. On one hand it's really impressive how far that's come, but then you can look through so much of that and you see so much more efficiency that could be unlocked. And I think that will only be a function of the continued platform build, which obviously you guys are a big part of building out.

Ciaran Fitzpatrick: And you mentioned bottlenecking actually there. Where do you see that on your side of the business given the expansion? I think there's talk of getting to like 12, 14,000 ETF lines given the share class model that may come about in the US. Where do you see the bottlenecks coming?

Matthew Legg: So I see the bottlenecks coming in a few places. One and most obviously just is in terms of the quantity of pricing that's required and the speed of developing that pricing infrastructure. So as you mentioned, as the asset classes continue to expand, just the quant resource to be able to automate that whole process is very significant. There's also quite a significant bottleneck just in terms of onboarding as an AP. So we have long AP onboarding queues, we work through them as quickly as possible, but of course there's new issuers coming all the time, and that's not always the shortest process.

And then there's other elements, just... We mentioned it before, but use of balance sheet either through custom in kind basket trades or through seed capital. All of these new issuers are looking for servicing, really, in those kind of spaces, and there really is just a finite amount of that that can be provided across the street, and the demands on that are becoming very significant. And you mentioned before about strategic partnerships, but I think that's where the value of strategic partnerships really starts to grow because as these resources all become more in demand and more scarce, the ability to be able to access them will be key to success for ETF issuers.

Ciaran Fitzpatrick: We could just start cloning you and your team, actually, and it'll probably help with moving along. Where do you think the industry is going to go in the next... What's the wave from your perspective?

Matthew Legg: I think within active, we're just starting. I mean, depending on how you classify that segment of assets, it could be 35 trillion, 40 trillion, some number, just depending on your classification. We're about 1.25 trillion in or 1.5 trillion in, so there's so much road to run in that space. The way I think about that evolution is to say we think about the ETF wrappers being the wrapper of choice for passive, and passive clearly has zero active risk. As you move down the active risk spectrum, or along it, and you get more and more active risk in a strategy, you start to move further away from that passive model where ETFs were clearly the preferred wrapper. I don't think mutual funds become the preferred wrapper at 1% or 5%, but as you move down that spectrum at some point in terms of concentration and liquidity and the other... Maybe the constraints or the issues you might find as you wrap something in an ETF, they will start to outweigh the benefits.

So at some point on that spectrum we'll get the tipping point. We don't know where that point on the spectrum is, and it'll obviously be a gray area in between, but I think we continue to move down that active risk spectrum for a period of time as issuers launch more and more and more complex strategies. I then think we expand outside of traditional, let's say, single asset class strategies to multi asset strategies and to nonlinear strategies. And we're already obviously seeing some of that happening, but I just think all of that expands. And as you do that, I mean really the possibilities around this...

Ciaran Fitzpatrick: There's a lot of talk about tokenizing ETFs. We're seeing a lot of tokenization and money market products, which obviously can be used for intraday collateral. So a really good use case. Obviously JP Morgan have a digital platform through Connexus, so certainly looking at proof of concepts around ETFs from a tokenization perspective. But I find it interesting, what's out there today for tokenized ETFs is like an add-on to a traditional ETF. So all the standard processes take place and then shares are issued in the standard model, and then there's a one-for-one tokenization. So there's a token issued off the back of the traditional share.

Matthew Legg: Can tokenize intermediate that? Can tokenization replace the ETF wrapper in that process?

Ciaran Fitzpatrick: I think that's probably where it's going to start to go. When, I'm not sure, but I think that's a proof of concept that an ETF share can be tokenized and issued, but do you get away from... So you need to put a digital TA in place. You need to have an entity that can actually tokenize the shares and then you've got your digital exchanges or... Like the exchange like cash versus tokenized ETF units makes perfect sense from that perspective. But I suppose what's it fixing unless you're actually reducing costs and taking elements out of it?

And I think a lot of the conversations we have today is you get the new generation buying crypto and holding a digital wallet, and managers are looking at it going, "Well, I want to make sure I hit that target market and I want to make sure I'm on those platforms. And when this does evolve, I want to be able to offer my product in a tokenized version." So I definitely think it will go that way. I'm sure the products will live side by side, but there's a huge amount of focus... I think Singapore is doing a lot of work, the MIS in Singapore, very focused on allowing tokenization and innovation in that space. A lot of these products, innovation is what's driving them, and I think that's been the same for the last 30 plus years. But again, it just goes back to every corner you turn, ETFs are forming a part of the new evolution of the financial industry. And I think the fact that we have capability in traditional, in markets, and now in the digitization and tokenization spaces, it's just one of the huge advantages we have as a firm.

Matthew Legg: So question for you, one of the things we commonly get asked is, will the launch of an ETF or do ETFs come at a lower price point from a TUR perspective? How do you see that? Do you think ETFs inherently price lower than mutual funds? And how do you think that will evolve going forward?

Ciaran Fitzpatrick: Yeah, it's certainly not all about the TUR. So there's obviously additional costs that a new issuer needs to take into account, and I would say when you put mutual fund launch side by side with an ETF launch, the ETF launch is going to be more expensive because you're paying registration costs, you're paying listing costs depending on where you want to put your product. You've typically... If you look from a European standpoint, you've got the CSD costs and the common depository costs. That's a settlement model. In Europe, you pay market makers and APs. In the US you can't do that. So even there's a differential between the US and Europe and Australia where you can pay market makers, but in the US you can't. So I wouldn't just focus purely on TUR when I look at total cost of ownership, I think it's important to look at the other elements that... And we always go through this with new managers coming into the market. We support them trying to build up what their TUR should be, but what are the additional expenses?

But then I flipped that on its head and you look at, well, what are the difference between the ETF and the mutual fund and where can you externalize costs? And you on the authorized participant side know that the AP will typically not only take the cost of the NAV, of the price of the ETF, but also trading costs, slippage costs, and some element of custody and trading custodian costs. So that allows the issuer to outsource some of the costs, which allows them to reduce the fees. So it's not a quick fix. It's not a panacea for poorly performing mutual fund. You've got to be in the ETF game for the long run. We've seen a lot of managers come in, good strategy, but don't have what we talked about earlier, sales, distribution, cap markets, and the products fail.

Or it's like," Oh, this costs more than I actually thought it would to actually build." It's not the point anymore you have to convince an issuer they should be launching ETFs. I think we're at the stage that they can see that that's the way the market is leading. It's just making sure you've got all of the building blocks in place from start... Look, that's part of our job as a service provider and on a markets business to educate and make sure that issuers can get from soup to nuts and understand the whole process at the most aggressive price point, but also making sure that they have the right operating model in place. And I think obviously having... We've touched on the services, but custody business, markets business, and then trading and seeding and capital and all of that that we offer, that's where I see the real benefit.

Matthew Legg: And the more possibilities there are to fund efficiencies, connect, and provide a more seamless service. A client recently said they'd gone from having to having to explain internally why it should be an ETF, to saying why shouldn't it be an ETF?

Ciaran Fitzpatrick: There may be additional costs to launching the strategy from the get-go, but as we're seeing the transition of assets from mutual fund into ETFs, it's... I wouldn't say it's a no-brainer, but it's certainly a decision that's being made more and more on a daily basis by new issuers coming to the market.