Tool Boxes: The Containerization of Finance

Three simple financial instruments – trackers, CLNs and the all-powerful AMC – are set to do for investing what the shipping container did for global trade. Tokens will play a part as well.

In this week's podcast I talked to GenTwo co-founder and Chairman, Patrick Loepfe, about how he has been rethinking the securitization process with an eye to reducing friction and cost.

Among other things, we talked about the importance of standardization and the “containerization” of finance.

In this post I would like to unpack the containerization idea a bit more, with a focus on the containers themselves. (In a follow-up, we’ll look at the rails they ride on.)

Same Same But Different

As I've written before, the process of creating financial products has historically been heavy on complexity and friction. In most industries, such problems are tackled among other things by standardization. Think USB ports or Number 2 pencils.

Or think of the modern shipping container, which revolutionized global trade by providing a standard holder for any kind of cargo, making transport much easier and cheaper while remaining flexible.

It's no different if you want to standardize the process of creating financial products. To do it, you'd want a standardized set of containers that travel on the existing rails of the financial system.

Luckily, there are several of these that fit the bill. The three we rely on most at GenTwo are:

• Trackers
• Credit-Linked Notes (CLNs), and
• Actively Managed Certificates (AMCs)

Let's look at each one in turn.

Shadow Play: Trackers

A Tracker is the simplest form of financial container. As the name suggests, it simply tracks the performance of an underlying asset. Think of it as a mirror that reflects the value of whatever is placed in front of it.

The structure is straightforward: you have a certificate (the container) that represents direct exposure to a specific asset. If that asset rises 10% in value, your certificate rises 10%. If it falls, your certificate falls in tandem.

This concept isn't new – ETFs that track indices like the S&P 500 work on a similar principle. But it can get quite innovative – and interesting – when applying it to exotic assets that have traditionally been non-bankable.

The main thing to understand about trackers is that they are single-entity containers: you can put one thing in them. It's a pure pass-through structure with minimal moving parts, making it ideal for investors seeking undiluted exposure to a specific asset.

In Your Debt: Credit-Linked Notes (CLNs)

The second type of container is the Credit-Linked Note, or CLN. Unlike a tracker, which mirrors the performance of an asset, a CLN is essentially the securitization of debt.

Here's how it works: instead of tracking an asset's value, a CLN represents a loan or credit arrangement. The investor buys the note, effectively providing the funds for the loan, and receives interest payments over time and the principal at maturity – assuming there's no default.

CLNs are particularly useful for creating debt instruments that wouldn't normally be accessible through traditional channels. For instance, a small or medium-sized enterprise (SME) might find it difficult to issue a conventional bond due to the costs and volume requirements involved. But with a CLN, they can effectively create a "mini-bond" that's tailored to their needs and accessible to a wider range of investors.

The key advantage of the CLN container is that it makes debt financing more accessible and flexible – both for issuers and investors.

Potpourri: Actively Managed Certificates (AMCs)

Of all the financial containers under discussion, the Actively Managed Certificate (AMC) is perhaps the most versatile and powerful. If a tracker is like a mirror reflecting a single asset, and a CLN is like a loan agreement in a tidy package, then an AMC is like an entire investment portfolio in a box.

An AMC is similar to a mutual fund in that it represents a portfolio of assets that can be actively managed over time. But unlike a traditional fund, which requires extensive setup and ongoing regulatory compliance, an AMC offers a much more streamlined approach.

Here's where the containerization concept really shines. The AMC itself – the container – is standardized. It has an ISIN number, can be held in a custody account, and traded through normal banking channels. But what goes inside that container can be almost anything: stocks, bonds, private equity, cryptocurrencies, art, wine, classic cars – you name it.

The AMC's power lies in its ability to accommodate virtually any investment strategy or combination of assets while maintaining the standardized external form that allows it to integrate seamlessly with existing financial infrastructure.

Coda: Tokens as Containers

No discussion of financial containers would be complete without mentioning tokenization. In many ways, tokens serve a similar purpose to the traditional securities we've been discussing – they're standardized wrappers that represent ownership of or exposure to underlying assets.

The key difference is the infrastructure. While securities like AMCs operate on traditional banking rails, tokens exist on blockchain networks. Both approaches have their advantages. Traditional securities benefit from integration with existing financial systems, while tokens offer features like programmability and potentially greater efficiency in certain processes.

A Uniform Package

Standardization is what enables democratization. By making the containers uniform, we dramatically reduce the cost, complexity, and expertise required to create financial products. This opens the door to a much wider range of product creators beyond just large banks. With the 'packaging' problem solved, these creators can focus their energy on what goes inside - opening up a universe of previously non-bankable assets to a much wider range of investors.

In a follow up post, I'll explore how these standardized containers run on banking rails and examine some of the most innovative use cases we're seeing in the market. We'll also dive deeper into how the network effects of the global banking system amplify the power of these containers.

In the meantime, I'd love to hear your thoughts. Have you encountered financial "containers" in your work? Do you see potential applications in your area of expertise? Let me know in the comments.

With warm regards,

Tom Lyons, Head of Content, GenTwo