DLT settled note issued via ResonanceX multi-issuer platform matures at 13% pa after two months
Last week the first fully automated structured note which was cleared, settled and registered on a public blockchain, matured delivering the maximum potential payout. Marex's debut trade which went through ResonanceX multi-issuer platform, was a two-month capital protected growth digital structure linked to the performance of the iShares Core FTSE 100 Ucits ETF. The fully protected product matured after 60 days delivering a 13% annualised coupon as the underlying was up by 2.5% on its maturity date.
The embedded FTSE 100 derivative expired (in-the-money, making investors happy with a 13% pa yield) and the investment's proceeds settled back to investors' accounts within a few minutes, according to Hariton Korizis, head of structured products at Nivaura, the fintech company providing the blockchain clearing and settlement capability.
"[This shows] a significantly different picture to the central clearing and settlement route's typical delay of a few days to two weeks," said Korizis. "We live on the cusp of a significant transformation where a technology like DLT, originally created by hackers and open-sourced is so powerful that within less than 10 years is being applied to the most demanding and complex financial sector."
According to Korizis, 2018 is the year in which major household financial services will apply distributed ledger technology (DLT) in their operations, "driven by the obvious benefits of cost and risk reduction and the boost in transparency and compliance that it leads to, when applied properly within the existing regulatory framework", according to Korizis.
"Equally importantly, we will see reduced friction in the economy and increased competition in services and pricing, as a result of increased automation and vertical integration of operations, allowing agile firms to broaden their reach, serve their customers better, expand quicker and innovate much faster that what was possible in the past," said Korizis.
The product has delivered the maximum upside possible, and getting a 13% pa return on a two-month capital protected UK sterling-denominated note is "pretty unique", according to Nilesh Jethwa, chief executive officer at Marex Solutions. "We don't know of any similar products delivering this kind of yield," said Jethwa. "When you compare 'apples with apples', the return of this product is stellar... This proves that the approach we have taken provides an efficient way to invest and use structured products."
Marex's funding levels are quite aggressive at the moment because the company is seeking to establish itself in the market, and its funding levels are superior on a risk-adjusted basis because of the efficiency it has created in the treasury function, according to Jethwa. "At the same time, we have also shown that technology provides a more efficient ways to transact and reduced significantly the marginal cost of production, and that can be passed onto the end investors," said Jethwa. "We did a controlled experiment to clear and settle the trade via blockchain. Usually this kind of transaction will take two to three days to settle whereas this trade took just several minutes which makes it a lot more appealing from an efficient and cost perspective."
Jethwa pointed to the speed to market, the cost of transacting and the security around the trade as the three elements to highlight from this trade. "Technology makes it cheaper to transact," he said. "The safety issue is key and is resulting in a fundamental shift as you are democratising trust from one party (custodians) and this is where DLT will disrupt some of the function in the structured products market."
Traditionally to clear and settle a trade you will have to go through an international central securities depository, global custodians, sub-custodian, and you have to make sure the correct orders are sent to each party involved, according to Guillaume Chatain, chief executive officer and founder of ResonanceX "This process involves significant human intervention through emails and phone calls, as we could observe at first-hand during our test, making a settlement at T+2 days quite challenging," said Chatain. "On the other hand, the settlement of the blockchain based note took less than five minutes at inception as well as at maturity of the product. It was interesting to see that the cost of settlement was also critical."
"We estimate we could reasonably reduce minimum issuance size by a factor of 10x to 20x and most investors will be able to buy their very own note in the future," said Chatain. "Another element that adds value to this product is that it was transacted in a regulated environment. The regulator was in the room and supervised every single step of the trade, which proves our technology is compatible with current custody rules client client's money and assets."
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