A few weeks ago Marc Wolterink from SRP, the leading online resource for the global structured products community interviewed our co-owner Kees de Koning. Their lengthy and lively conversation lead to not one but two articles published on SRP. Last week we've published part I of their interview, previously published here. Today we're pleased to present you part II, previously published here.
In the second part of our profile on VI Company – the Rotterdam based fintech firm which has developed a market data platform for Boerse Stuttgart Cats, a trading platform for Berne Exchange (BX), website portals for ING and Think ETF and an online trading game for RTLZ , amongst others – co-owner and founder Kees de Koning talks to SRP about the use of alternative asset classes as underlying for structured products, peer-to-peer (P2P) lending, the impact of regulation, generation Y and the company’s plans for 2016.
Together with HJCO Capital Partners (HJCO), an investment firm for active and alternative investments, VI Company is currently in the process of issuing a note which is linked to a portfolio of P2P loans which originate in the US. “Traditionally investors have always been looking at bonds, equities, commodities, currencies – the traditional asset classes – however, due to the low interest rates people are increasingly looking at alternatives,” says De Koning. “P2P lending for example is something we are very active in right now.” P2P matches lenders directly with borrowers through online services, such as Prosper, a US company with more than two million members and over US$6bn in funded loans.
“Are Dutch investors ready for P2P linked notes? Absolutely not because it is completely new—It starts with education. That is of course with the traditional structured products also the case but with P2P we really need to invest in education.”
“On the one hand P2P collects money from individuals or businesses who want to achieve yield and on the other hand there are the potential borrowers who are classified by risk category and then you have the investor who says: I want to invest €10,000 in A-loans,” says De Koning. “A is low risk so you will only get 4 to 5% return. But no bank gets involved in this process. This happens in the US, in the UK and also in Europe we now start seeing the first platforms. It’s becoming very popular.” The HJCO note will get a listing at the exchange, according to De Koning. “There is liquidity. In future a retail investor can enter the ISIN in his account and thus invest in P2P loans in America which have been verified by the Prosper website in the US. I think that’s the future. An alternative way of achieving yield,” says De Koning.
“Are Dutch investors ready for P2P linked notes? Absolutely not because it is completely new,” says De Koning. “It starts with education. That is of course with the traditional structured products also the case but with P2P we really need to invest in education. Because it is new,” he says. “The AEX, that’s something the average Dutch person understands. But when you come with P2P lending, that is the next level.” The idea behind the platform VI Company is building for HJCO is that investors no longer have to buy the product via their broker but instead can buy the product directly online, according to De Koning. “In this case [HJCO] said to us: this is wat we want to develop, this is my problem, please help me to get the first version online as soon as possible, so we can go out and explain the product and investors can start trading,” he says. “That’s what we have done. I think the product will be launched within a month or so.”
“Scenario one is adoption by the established players. Financial institutions adopt innovation and relatively little will change to the structure of the financial sector – We are definitely part of scenario one, adoption by the established players. We help the established players by putting in the market those initiatives or by improving existing initiatives, because that’s also possible.”
In January the Dutch National Bank (De Nederlansche Bank – DNB) published a research report Technological innovation and the Dutch financial sector. One of the conclusions of the study was that if the established Dutch banks are too slow to adopt innovations, their business model will come under pressure on several fronts. “The report talks about three scenarios,” says De Koning. “Scenario one is adoption by the established players. Financial institutions adopt innovation and relatively little will change to the structure of the financial sector. Scenario two is a certain fragmentation due to fintech, because new specialist market parties effectively start competing with the established order. Scenario three sees large technology companies like Google or Apple oust the established financial institutions by making use of their scale and innovative capacity.”
“I like the report. It hits the nail on the head,” said De Koning. “We are definitely part of scenario one, adoption by the established players. We help the established players by putting in the market those initiatives or by improving existing initiatives, because that’s also possible. Because nine out of ten times banks cannot do this themselves.” Banks have got their hands full on a number of issues and more often than not they have not enough people to develop those let alone people who understand the complex world of structured notes, according to De Koning. “A solution then is to hire a team who can.”
“We see that, also due to the attention in the media, financials have really started to wake up. I see that as a positive trend.”
Like many other firms, VI Company’s business model is impacted by regulation – both on a national and a European level. “Yes absolutely, 100%,” says De Koning. “We have a lot to do with Priips/Kid, which will be implemented at the end of the year,” he says. To prepare for Priips/Kid many parties have started to create standard products, according to De Koning. “I think (over) regulation can be a threat to our industry. Some parties quit because of that. They say there are so many costs involved, there is so much regulation, I no longer want to be a part of this anymore,” he says.
“If you see that Mifid 2 has been postponed by a year, simply because there is such a big technical impact, there is so much that still needs to be done, they need more time to launch it. You can imagine if creating the report, the preparation and writing, if that alone takes so much time that you need an extra year, then you can imagine how much time product issuers and banks need to implement it.”
On a local level, following an investigation by the Dutch regulator Authority for the Financial Markets (Autoriteit Financiële Markten – AFM) in 2013, issuers of leverage products in the Netherlands agreed to no longer issue turbos with a high leverage factor. Earlier this year those same providers announced that they are preparing to deploy a new measure which limits the leverage of turbos to a maximum of 50. Leverage products will get a bid-only status if the buffer between the price of the underlying and the financing level becomes smaller than or equal to 2%, which means investors can still sell these products but are no longer able to buy them.
“[The bid-only measure] does not affect us directly but our customers have to go out and explain this to their clients. There is an educational aspect,” says De Koning. “It has no implications for us because this is going to be settled on the side of the trading systems. Euronext must arrange that there will be bid-only on these products. Cats too. So it is not driven by the issuers but more by the trading systems.”
De Koning thinks it will take a little bit of time before the new bid-only measure will be implemented. “It can be a good thing to protect the investors, although I do think it is a little bit strange that leverage products are regulated very strictly by the AFM while CfDs are not addressed at all by the regulator. And with options I would be able to make much more dangerous constructions,” he says. “But ultimately I am happy that they move the maximum leverage to 50 and not to 10 or 20.”
“Our clients are happy with us. We don’t just work for profit. Of course it is important that the company is healthy but the work should be fun too. Work must be good, it must be fun and you must be proud of what you deliver to the client.”
The year 2016 is going to be a turning point for VI Company, according to De Koning. “I think that this year, for the first time more revenue will come from abroad than from the Netherlands,” he says. “We really are a niche market. We are in the financial market, asset management, structured notes, distributors and trading venues. That is a relatively small world of course so you end up going abroad, beyond the Dutch borders, very quickly,” he says. “Our clients are happy with us. We don’t just work for profit. Of course it is important that the company is healthy but the work should be fun too,” De Koning adds.
“That sounds very much like a cliché but if you look at our staff, they are almost all Generation Y. The average age is 30 years. It makes no sense to push these guys on profit or turnover, it is of course important, but it makes no sense. Work must be good, it must be fun and you must be proud of what you deliver to the client.”
VI Company has started working on its own products, according to De Koning. “Until know we have worked almost exclusively for clients who for example hire a team for a week. Not on a project basis. But we also see that there is a need for certain specific products and we think about developing these ourselves.”
The firm is currently working with a number of market makers to build a monitor for statistics were market makers can monitor the quality of trading or determine their market share, says De Koning. “It is pretty easy to calculate a market share in the regulated market but in the OTC market it can be quite difficult. We are now working on a minimum viable product (MVP) to set this up together with a number of issuers.
Click the link to read the DNB report Technological innovation and the Dutch financial sector (Dutch).