February 21, 2020
Having experienced 22 years in capital markets in the US and Europe, with a focus on derivatives, cash equities and cross-asset class solutions, and in banks, asset managers, family offices, the big four and technology firms, I believe my opinion is valid enough to share in these comments. Risk profiling of individuals, entities and financial instruments is not an easy task, especially where derivatives are involved. Making the subjective, objective is where the difficulty normally lies and everybody cannot be protected fully from loss of investment. But what we can say about ETFs vs. standard or exotic derivatives contracts is that ETFs are far easier to understand and far less risky. This is due to the fact that there is no time element and no business events that trigger changes to the contract. The investment has unlimited upside and therefore theoretically it could bring your investment to zero faster than non-leveraged, but that either should be clear or be made clear to investors. The biggest risk is default of the issuer of the ETF, default of the counter parties with whom the issuer is hedging the product against and the potential misunderstanding that some inverse ETFs are leveraged more than 1 to 1 with their index. I believe all of these are the same risks (or even lower risks) than currently accepted non-inverse products in the marketplace. It would seem to me the reason the SEC wants to remove these, is because they enhance the pressure on the market moving downward and there is great incentive within the powers that be to have markets move up.