The Andorra-based private bank is building up its capabilities to offer crypto structured products aimed at its risk-averse clientele and playing the market dynamics to offer added value.

Morabanc made the decision to include cryptos in its offering about 18 months ago and has put together a dedicated crypto assets team.

The private bank has tested the main derivatives and structured products players with dedicated desks in the market and concluded that the sell side is only “starting with this kind of coverage, but few counterparties have already arrived, including Marex, Leonteq and Goldman Sachs”.

“On our side, the important tool is to have active ISDA / CSA to can trade the OTC hedge (swap / options) to issue the product with our own paper,” Ferran Vila, head of structured product desk and flow desk, Morabanc, told SRP.

We have started with structured products once we had the Isda agreements in place as we seek to capitalise on the crypto tailwind that started last year - Ferran Vila

 According to Vila, it is a matter of time before the use of crypto products becomes more widespread over the next few years, but the bank’s approach to cryptos remains conservative.

The first crypto structured products offered by Morabanc were launched in September 2023 and were based on replicating the defensive equity payoffs already uses for its traditional offering “but using cryptos as underlyings”.

“We have already seen clients trading flow products linked to cryptos on an ETP / ETN format from different providers like WisdomTree and Grayscale, but other clients wanted to access this market with capital protection or partially protection, and this is what we’re doing at the moment,” said Vila.

The initial set of structures had a an 18-month term with 85% capital protection and a focus on growth instead of income.

“Our clients are not seeking to gain coupons on crypto structures but participate on the upside performance of those assets and we do this by buying calls up&out with rebate or call spread  and selling put spreads,” said Vila.

Out of the 10 crypto structures marketed in September the bank has already unwound several trades in the secondary market “thanks to the upside performance of the crypto market”. 

Portfolio approach

As a private bank, Morabanc’s focus is on providing “a suitable offering” that responds to client demand for access to alternatives.

“Our goal is to build a range of products that can offer access to new assets and cater for the asset allocation needs of our clients’ portfolios,” said Vila.

According to Vila, most of the bank’s clients are looking for leveraged exposure. However, by using structured products the bank can offer the protection as well as some leverage.

“We believe there is room in our clients’ portfolios for allocation to this kind of assets via defensive structured products,” he said. “That is what we like about structured products – they provide different alternatives that fit different risk profiles.”

“We believe that with such volatile assets offering a 10% rebate if the underlying goes up by 60% and have 85% protection if the asset goes down is a good trade off. We are also aiming at short-term one-year structures to monetise the halving.”    

Eighty percent of the products we have done in 2023 have been capital protected as well as credit-linked notes with 12 to 18-month maturities - Ferran Vila

The current interest rates environment also enables us to play with interesting payoffs and the protection element which is very important for many of our clients.

“The short-term yield curve is allowing us to look at structures that we could have not done when interest rates were at zero” said Vila..

Looking back

The private bank has had “another year with high volumes mostly driven by capital protection products which somehow reflect the market dynamics around the yield curve – the curve is currently inverted which means that short term interest rates are higher than long term interest rates.

“With an inverted curve most opportunities are in the short-term. Eighty percent of the products we have done in 2023 have been capital protected as well as credit-linked with 12 to 18-month maturities.”

This enabled the bank to almost double the nominal traded compared to last year.

“We have done a lot more volume but from a P&L perspective we have done a lot more protected structures which proportionally eat up some of the P&L,” Vila said.

“If you have a very defensive portfolio of products, you have less risk in your books, but you also have less opportunities in the secondary market. If you’re adding some vol to the market with your hedging that also generates opportunities in the secondary market… whereas with a conservative portfolio you go with everything until maturity. From a risk standpoint you’re safer but you will have less opportunity to take advantage of secondary market opportunities.”

According to Vila, actively managed certificates (AMCs) have also gained weight within Morabanc’s offering as it is a product that “makes sense for a lot of clients”.

“We’re considering new products in this format for some of the clients we cover outside our core market. We are in talks with several counterparties to build a new range with different strategies.

Vila believes that AMCs provide a very efficient vehicle to play different jurisdictions and simplify custody with the ideas of developing your own strategies and putting them in the market.

“We have tested several AMCs linked to bonds and we’re looking on other asset class as funds, structured products that could fit in an AMC format with a high degree of diversification,” he said. “AMCs also fit very well with the shift towards customisation and away from one-size fits all and will resonate with clients that have used in the past. For us, it offers a very flexible vehicle to be quick to market and opportunistic without having to go via the fund route.”

Asset classes

On the CLN side, the bank was also active and deployed several “very basic short-term structures with very well-known investment grade senior debt names”.

“On the CLN side we have seen During the second half of the year we have readapt these CLN adding a layer of rates, typically range accrual or floaters flavours on Euribor or Sofr ,” said Vila.

Equity payoffs with capital at risk which have been driving Morabanc’s volumes over the last few years have almost disappeared as the bank only did “a handful of tailor-made structures with full capital-at-risk”.

Over the last couple of years banks in general have not used deposits to raise money as they did traditionally and have used structured products to replicate what a deposit would offer instead.

“The sensitivity of structured products to rates has been laid bare over the last two years after a prolonged period of zero rates,” said Vila. “We have seen over the last few months fluctuation in the bond and equity markets based on the expectation of falling rates.”

Going forward, according to Vila, the challenge for 2024 is to find leverage to capture good potential coupon or growth.

“We have done several 12-month Euribor range accrual structures recently and think these will have value and resonate with investors this year,” he said. “There will be opportunities around the yield curve and the forward to offer higher coupons.

“We think this kind of structure could offer an alternative to fixed income structures which at the end of the day create a bottleneck as everyone is offering the same and not adding much added value to their clients’ portfolios.”