vestr’s Head of Business Development, Stefan Wagner, speaks with Joost Burgerhout and Harry Benchimol from Marex to discuss structured product innovation.
The three also talk about the following in this episode:
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Joost: I joined in 2019 to set up Marex Financial Products and to set up a new issuer that is not dependent on a bank or bank’s balance sheet. What is unique about Marex is that we issue off-balance sheet.
Harry: I joined in 2017 to build Marex Solutions and am responsible for the derivatives engine as part of the structuring team.
Joost: The typical clients are professional investors, ranging from wealth managers, IFAs, family offices, small investment funds, pension funds, as well as bigger institutions. We help them provide efficient access to all sorts of markets through the issuance of notes and certificates on a taylor-made basis.
Harry: The biggest challenge was the crypto initiative last year. Through which we could give our clients exposure to this rather new asset class. At first, we had to convince and educate our internal teams about what crypto currencies are and what the blockchain is. For example, once you transfer a bitcoin to the wrong party, you cannot take it back. This is quite different from the traditional SWIFT system. Mis-trading is virtually impossible. It is quite different from the traditional equity structured world. It took a few months to educate our teams, and eventually we issued our first crypto certificate.
Harry: Let me give you more background on what we had done in the crypto space already. Back in 2018, we were the first issuer to launch a structured product on the blockchain. However, since the crash of crypto currencies, we put this on hold because we did not get any further demand from our clients. Then in January 2021, with all this news around crypto currencies, we decided to manufacture an auto-callable on Bitcoin. Simply to test the appetite of our clients.
Harry: Exactly. We started with Bitcoin only. We replaced the classic auto-callable on Nestle-Novartis-Roche and put Bitcoin instead. Given the volatility of that asset, yield of this product of a high coupon and with an interesting down-side protection. This was a massive success within only a few minutes of trading the product. And even today, the crypto underlyings are the most priced underlying within our internal agile platform.
Since January , we have extended our offering to more underlyings and products. Including the famous Bitcoin Cash & Carry trade.
Harry: We do not offer all crypto currencies yet as an auto-call format. But right now, if you have to choose between Bitcoin and ETH [Ethereum], it is going to offer the higher yield right now. Because of the higher volatility.
Joost: Actually no. We have a team of 10 experienced derivatives traders and risk managers of complex products, and our team is fully cross-asset. We consider Bitcoin as another underlying, obviously with larger volatility.
Joost: Actually, the market has developed quite a while. To mitigate the risk of our structured products on crypto, we add some edges, options, calls and puts, listed instruments. We trade futures and spots, so actually it is very similar. The Bitcoin market is very liquid, trading a few billions every day. As long as you stay within the most popular crypto currencies.
Joost: We wanted our clients to benefit from the difference between the Bitcoin spot price and future price, and ETH as well. We packaged this into a security, a structured product, generating a fixed return without any exposure to the Bitcoin price movement.
Joost: The recent growth of Bitcoin has generated interesting derivatives. And people, in particular retail investors, wanted to leverage themselves. So, they were buying futures instead of the cash price. On top of that, many entities were unable to get exposure to the Bitcoin price directly. So, they cannot buy the spot or store the crypto currencies. They are only buying the derivative instead, and they are buying the future. The last point; many crypto currencies players are lending Bitcoin to get US Dollars. To add to that, the counterparty needs to sell the Bitcoin spot to buy the futures.
Harry: To the last point; tracking Bitcoin on futures was launched as well. So, they moved up the futures curve quite heavily. That’s the only way you could actually get that exposure.
As to the client’s interest: it was just overwhelming. This is the only product I have seen that was pretty much sold out before it launched. There was way more demand than we could offer. We issued the first tranches in May last year with a maturity of around 4 months. They all redeemed at 100% plus their coupons in September. And we had even more investors waiting for the second round of investments.
Harry: It was a fixed yield. So, the investor would enter a transaction where they would pay 100% on day 1. Then, at maturity redeem 100% guaranteed plus a return.
Joost: Yes, we recently announced our partnership with Coinbase. They are our main custodian to store crypto currency as well as our main liquidity provider. We believe that we have complementary strengths. We both share the ambition of transforming the market, offering new innovative solutions in this fast moving world. Our competence of manufacturing derivatives with Coinbase’ expertise of crypto, I am sure we will bring this new asset class to the next level.
Harry: Absolutely. In the crypto space we have seen autocallable products on Bitcoin and Ethereum. We have seen the Cash & Carry trades. We can issue Delta One certificates, which are static products as you mentioned, they can track any sort of coins. The next step, which will be coming soon, will be Actively Managed Certificates tracking cryptos. And that is thanks to our partnership with Coinbase as well. Meaning someone managing a certificate will be able to trade in and out on a daily basis on a pretty large pool of cryptos.
Joost: DeFi (Decentralised Finance) is a very hot topic. We see a lot of interest in that new ecosystem. That ecosystem aims to almost recreate the traditional financial systems and we do get asked by our clients how they can access this ecosystem. Because they would like to buy, but cannot directly buy coins directly. To get exposed to this DeFi ecosystem, we are launching a DeFi tracker to replicate the top 10 smart contract enabled blockchain. And the Top 10 DeFi projects using blockchain technology.
Harry: Quite a lot. What we have managed to establish at Marex in a relatively short period of time is the complete automation of the issuance of a structured product. The typical Nestle-Roche-Novartis or Apple-Amazon-Facebook is a click and trade. Now, with documents generated automatically, we have moved into the first step of cryptos now with the first range of products. And we are looking to expand this further. Our mission at Marex is to provide innovation to the industry. AMCs on cryptos will be a big one. Obviously, if we are looking at crypto or the blockchain then there are two elements. One is the asset class and the other is the technology. We are looking strongly into the underlying technology and how that can be used in the future of structured products.
Harry: One common myth is derivatives. Quoting Warren Buffet, they are “Weapons of mass destruction”. However, I think if a derivative is used correctly, and this is typically the case in structured products, then it is a real addition to the portfolio. It enhances the risk profile of an investor’s portfolio. Ultimately, that is our mission. Providing investors with the best possible returns. So, structured products definitely have a place in one’s portfolio.
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