Banks remain too big to fail and there is still opacity surrounding securitisation and structured products. This is the view of banking and derivatives veterans Philippe Naegeli and Patrick Loepfe, who have launched a new platform - dubbed GenTwo - aimed at addressing these challenges.

Loepfe, founder and chairman at GenTwo, was previously chief risk officer at DIVAS Asset Management working on a derivatives solution and prior to that worked at Vontobel for over a decade in structured products and derivatives. Naegeli takes the role of ceo at GenTwo and is an investment banker by trade, having most recently been managing partner at Forstmann & Co.

Loepfe explains that after being in the structured products and derivatives sector for many years, he developed a clear view as to what needs to improve. A lack of transparency is high on the list, along with extortionate costs due to balance sheet expansion and regulation.

Naegeli expands: “We offer a way of segregating sector risk through the establishment of small separate SPVs to allow clients to hold and structure bankable and non-bankable assets off balance sheet.”

“To do so,” he continues, “we create for every client an individual and tailor-made issuance vehicle which will be based in Guernsey, although we are looking to launch SPVs in other jurisdictions too. Products are issued with a Swiss ISIN and are bankable worldwide.”

The firm aims to differentiate itself from others by enabling financial intermediaries to manage tailor-made, off-balance sheet issuance vehicles, or SPVs. As part of the process, the asset manager is placed in charge with full oversight and transparency as to the individual issuance and products, while bank issuer risk is removed.

By doing this, says Naegeli, the firm can avoid “risk aggregation” which is the “main driver of overheads in structured products”. By segregating risk, the co-founder says the firm can offer full transparency and an “open architecture”, further helping to lower costs.

A current project for the firm is securitising an ICO token, in order to create an ICO tracker. This is motivated by the possibility that an investor may not want to invest directly in the product due to the complexity of it and security concerns.

Naegeli adds that “with such a tracker, we can mediate several risks” but points out that overall, the firm is not “looking to create extremely complex products or extremely exotic payment streams...” such as CDOs. Instead, the founders are “aiming to create fairly simple products, but [it] can do basically all underlyings”.

He adds that GenTwo will engage with a range of asset classes including planes, ships and private equity loans. In the case of a structured product backed by airplanes, for example, the firm may put together a portfolio of planes and lease them out to clients (providing a yield to the investor), or it could sell the individual planes to an SPV and buy back the notes.

In terms of what GenTwo’s role in each transaction, Loepfe explains: “We set up an SPV for an asset manager and provide servicing support, where needed, to issue structured products. We can value, manage lifecycle events, manage term sheets and so on – all the administrative tasks needed to help firms issue structured products.”

The target clients are small to medium sized financial intermediaries, such as asset managers, smaller banks, family offices and others doing structured products but lacking the infrastructure of big issuers. GenTwo may also look to work with bigger firms, however, where they are working with non-bankable assets.

In terms of challenges to the firm’s growth, Naegeli suggests that change can be hard to accept, which could be a barrier in terms of “take-up” of the solution. Competing firms may arise, although the founders welcome competition as it may open the market to GenTwo’s technology, which they are keen to have shared and utilised around the globe.

Naegeli says that the firm is ultimately driven to solve the ongoing problem around risk segregation. Alongside this, he wants to address the issue of “too big to fail” which he feels is still a problem - one that has not improved.

He concludes: “If anything, the situation is worse now and - instead of resolving the problems - regulators have just stacked more regulations on top, which [has] forced the banks to cover for more costs and hence have to take on more deals, which therefore makes the bigger players even larger.”

RB