[00:00:00] Pritesh: Welcome to our sixth episode of Talking Hedge. I’m your host, Pritesh Ruparel, Chief Executive Officer at ALT21. In this episode, I’m pleased to be joined by Thomas Otendal, who many of you will know is the Group Global Treasurer for Saxo Bank. Thomas has an impressive career finance, and there’s not much he doesn’t know about treasury, but it’s where treasury meets technology that things get interesting.

Thomas has always looked to create opportunities to, whether increasing revenues or reducing costs to reducing capital concerns. It’s uniquely a truly data-driven treasury department that he’s built from the ground up at Saxo, focusing on the digital engagement, real time data and automation, adoption of the digital economy – all the things that we we’re big on at ALT21. It’s enabled him to lead the digital transformation of stacks over from a traditional finance investment trading space to the fast-expanding digital asset space. I’ve seen his accomplishments by building extensive capabilities across digital wallets, exchanges, connecting centralized finance with decentralized finance, and really seamlessly unlocking incredible opportunities for the firm.

In this episode, we’re going to use this opportunity to discuss the evolution taking place in the world of treasury, and specifically what’s driven by technology. We’ll look at the challenges, space and building infrastructure that safeguards assets, and how the impact of centralized finance and decentralized finance affects treasury management.

Thomas, to begin, it would be great to get a bit of background to yourself, Saxo, and where from a technology perspective you feel you’re servicing clients.

[00:01:53] Thomas: Yes, I agree. Thank you for having me on this podcast or webinar. It’s always a pleasure to come and talk to people that are interested in treasury and the future of treasury.

As you said, I’ve been in treasury all my professional life, from corporate investment banks and now into trading platforms. I have since 2014, when I started in Saxo with no treasury department, built up from Greenfield a treasury department that is a purely driven by data from our platform and data warehouse, and it’s built on top of that. But besides that, we also connect to the ecosystem of other banks, trading venues, and other providers out there.

We can get into that, but first of all I will give a little intro to what Saxo Bank is. Of course it’s in the name, it’s a bank. The reason we have bank is because we have banking licenses in Holland, in Denmark, and in Switzerland. Then we have a lot of broker dealer licenses around the world. But we’re not a traditional bank as you know from your normal debit card bank. We service our clients in the savings, investment and trading space. All financial asset classes that you can think, from all global exchanges and venues, we provide that into the platform. One view, one account across all these asset classes.

We have offices in around 20 countries, with the main hubs in Switzerland, Holland, London, Singapore. But besides that from Australia, China, Hong Kong, Dubai, Japan, and so forth.

Our business model is, as I said, to give clients access to all these financial asset classes, and package them together. We package them together from other market makers and venues, and we distribute them to clients on various platforms. We have one technology stack that we leverage. We have clients that are retail, clients that are more professional intraday traders, we have asset managers, and then we have widely able clients that could be up to tier one banks – which means that we have various kinds of platforms. We have the Saxo platform, which is for me and my mom, pretty simple. Then we have a trader platform with a little bit more like bling-bling Then we have a trader pro platform, which is more like Bloomberg style. We provide fixed APIs to fintechs and banks that have their own UI, but want the entire financial system is through one API into their own environment.

In order to facilitate that, we also need a treasury operation that moves cash assets around, collateralized it to liquidity management globally across 35 different currencies all the time, as you can imagine. That’s Saxo, and the treasury in Saxo.

[00:05:16] Pritesh: A quick background to a company with a lot of capabilities, clearly. In my view, Saxo was a bit of a pioneer in providing technology to companies that wanted to build businesses on top of it. Are you still flourishing in that era of banking-as-a-service, or are others catching up with Saxo?

[00:05:36] Thomas: You see a lot of platform providers out there that provide maybe only FX or only CFDs o only stocks and bonds. You rarely see a platform that provides the entire multi-asset space into one account, one single sign-on account, and then you can have everything. That’s a really powerful thing that Saxo has developed there. Stocks is not the same as a CFD or as a future or an FX product. It’s different providers and counterparts you need to engage with, it’s different messaging and different risk. Having all that in one engine is super powerful.

You can say, 5-10 years ago all banks were convinced that they were able to build this themselves. If you go 5 years back, you would have a platform for FX inside of a tier one bank, they would also have an equity platform, different kinds of platforms. But they couldn’t combine it, so you had to sign in to these various platforms.

With technology evolving fast and with the clients also adopting technology fast, there’s a really big demand for having easy user experience, a seamless experience. To attract for a bank, being tier one, tier two, tier three bank; to attract the right talent to develop in-house, is not a good thing. Many banks realized that too late. They’re starting now to figure out, how can we engage with third party providers that have something we can use probably now, and then start delivering the best user experience you can get in the market.

We are past the tipping point. These primary financial institutions have realized that they need somebody they can trust, that can deliver for them. That’s where this white label concept that we provide in Saxo is usually in demand right now as you see unit costs, cost structures being under pressure. You can’t defend spending seven years on developing a retail platform, because in seven years technology and user experience will be outdated anyways. You need somebody who has the hand on the stove, as we say here in Denmark, and actually develop it on the databases.

I would say we are still very relevant in this space. Of course, you see fintechs popping up here and there, solving pain points within the space, but it’s typically like a single pain point or two. They can’t combine it all to one solution. We still have a competitive advantage in that space. We see ourselves as a FinTech. We started 28 years ago, and as our founder and CEO always says, we were a FinTech before the term was even coined. That’s where we are today.

[00:08:48] Pritesh: Do you think that your strength is that you’re constantly challenging your teams to have that conversation of buy or build it, and maybe we get to really understand what it was like building a tech first team?

[00:09:04] Thomas: Yeah. We engage with our direct clients, our retail clients. What would they demand? They take technology from back home into their financial lives as well, so how can we make it easy for them? How can we make it trustworthy, and how can we make them feel calm about their investing and savings so they can actually achieve their financial aspirations in the future, be it buying houses or retiring or whatever? Building that comfort into our platform is super important.

Then we have, on the professional side with asset managers and white label banks (or white label plants, as we call them), they also need a seamless and very cost efficient way of connecting to the global financial market, so they on their side can give their direct clients a seamless experience in the same way as we do to our clients. That of course requires interaction and partnerships in the technology teams, and that’s a super important for us.

[00:10:13] Pritesh: We were both at Money20/20 in Amsterdam, and it was there that I heard you talk about that they’ve got assets in all their forms. The question is, is the challenge here the intersection of centralized and decentralized finance?

[00:10:30] Thomas: It’s a huge, interesting topic. As I started out saying, we are a regulated bank with licenses in many jurisdictions. We are playing within that playing field, and we of course have to comply with regulations in many jurisdictions. We are not a front runner in this. We are looking very careful to what is doable and what’s not doable, but I personally see the move to digital assets. That digital assets could be anything from tokenized bonds, to stable coins, to crypto coins, NFTs, whatever. The entire global asset space, whatever it is, it’s going to be digitized and put on as a token on a chain somewhere. How to create interoperability between chains, how to transact across these different asset classes and change require some medium.

Today we have fiat currencies that work in many ways, but there’s a lot of friction in it. To me, stable coins, and right now we don’t have these government central bank digital currencies yet, but once we have them they will solve a lot of settlement risk. They will solve a lot of reconciliation issues, finance, accounting issues. They will have atomic real time settlement. That will solve a lot of issues for the financial sector and make the user experience much better.

Then there is the entire rick piece of it, the cyber risk, where people are a little bit afraid because the world works really nice and we trust that. But having the cyber risks is something we have to deal with as well. Who is checking algorithms? Who is checking these different smart contracts? Who’s doing auditing on this? It’s a whole new space that needs to be explored. You need to have certain standards, you need to have a certain risk mitigating factors in place, so you can actually start using it.

That’s something we need to work with; the technology providers but also regulators, talking to them, educating them, coming with our ideas, coming with our suggestions to how we can make a better financial world to solve for everything from inclusion to lower costs. There’s a lot of stuff there, it’s super exciting. Treasury is in the middle of everything because everything that has to do with liquidity management. Moving from A to B is a treasury management task.

[00:13:28] Pritesh: How quickly are digital assets growing versus traditional?

[00:13:32] Thomas: I’m usually asked what I think about these things. Of course, I don’t go into the discussions around cryptocurrencies like Bitcoin and PSLF, because that’s not something treasury at all can do. You can do it in your private life, but you can’t do it in business life. But to me, digital assets in a treasury perspective is more like tokens, like security tokens, stable coins.

I think we will see a huge adoption of tokens in 2022 on the fixed income side. The reason why I say that is, you have governments like European governments, that are issuing government bonds, that banks like Saxo Bank need to buy to hold as a liquidity profile. These governments and central banks, they are already exploring and have already issued government bonds as security tokens. They’re experimenting right now against digital euros and settling in wallets and back and forth, like you know it from the cryptocurrency space.

If governments decide to say a government issued security token has the same legal status as a traditional bond and has the same regulatory status, in the sense of risk rates on how much capital you need to hold against it, if it’s exactly the same as the traditional world, any bank can hold those assets. Then you would start to see banks buying security tokens on government fixed income products, because for them it’s easier to handle. The unit cost is cheaper, there’s instant settlement, there’s no settlement risk, and you can use it as collateral. It’s super-efficient for banks. I think that’s where it’s going to go first. But how fast it’s going to go, I don’t know. Personally, I have the mandate to do it once they start coming. It’s not a problem for me.

[00:15:42] Pritesh: As a corporate treasurer, as you say, you’re not going to be following the example of maybe Tesla and start putting some of your Bitcoin, but you can see yourself interacting with tokens?

[00:15:53] Thomas: On the Bitcoin and the Ethereum and the cryptocurrencies, there’s nothing I can do. I’m not sure that as a bank that you’d a desire to hold it. We have some client demand for these cryptocurrencies, but it’s not something we hold ourselves. We facilitate the trade for clients on this actual platform. Here, you can train the most common ones like Bitcoin, Ethereum, and Litecoin, against dollars, euro, and yen, but as a crypto FX cross. We don’t offer a wallet where people can hold these; we just offer the exposure. For treasury, I don’t need to manage crypto liquidity.

[00:16:42] Pritesh: Bringing it back to tokenizing DA products and things like that, do you feel that other incumbent organizations are moving quickly enough in terms of providing custody, trading, and infrastructure to bring this adoption?

[00:17:00] Thomas: Personally, I think the current custodians will probably not be custodians in five years. Some of them will still be around because you will have traditional assets, but their market will be much smaller than it used to be. Then you would have some of them starting to buy up in digital asset custodians to stay relevant, and you already see that in the space. But the important thing is that now that you are going to digital assets, it’s basically not a piece of paper you own anymore wise. It’s the piece of code, which means that the digital asset custodians need to not only make sure that nobody is hacking this, they also need to be the verifier of your underlying smart contracts or software code that represents your digital assets. They need somebody there to sit and say, this is a bulletproof piece of software, if it’s a public blockchain. There can be a lot of stuff happening if you have assets sitting on that, you need to be very careful.

It can be like a private permission blockchain where you know your peers in there. There might be, let’s say it’s easier to protect. But the digital asset custodians also technology companies, and they have to have like really smart resources sitting, auditing, smart contracts, and software code before they actually provide the custody solutions for financial institutions. It’s a big task.

[00:18:49] Pritesh: What’s next for you and Saxo Bank?

[00:18:56] Thomas:  For me, in treasury we have just implemented what we call an inventory management system. It’s a real-time inventory management system across liquidity, bonds, and all kinds of proprietary positions – you can see movement in real time. It’s in the cloud, so we see everything in real time across globally, different jurisdictions, product classes and client types and all that stuff. It is super important.

This liquidity management system or inventory management system is ready for also the stable coins. It’s ready to also include wallets. Today, most banks are account-based banks, where you have money coming in, the old world. But we are going to move into a wallet based structure where everything is going to be moving in real time. We go from T+2 today, to real time going forward. That’s a massive change for the treasury department, because we always have two days to figure out where to get the liquidity from and to settle stuff. But now it’s going to be atomic and real time between digital assets and wallets. How do we manage that transition? How do we manage our liquidity? That’s something we had prepared with this inventory management system.

Next step is, as I said, to adopt treasury wallets, omnivores wallets if you want that, settling government bonds into that, figuring out who we want to pay with fiat currencies or can we do a central bank digital currencies? How do we want to do that? It’s connecting our treasury management systems with the traditional world on one side and the digital asset world on the other side, and trying to manage that.

But it is not something Saxo can do alone. We are dependent on the infrastructure at hand in the entire ecosystem. Besides that, every bank needs to be able to do that, and we need to decide on standards and infrastructure. It’s a big task, but we try to come up with some good ideas and some intelligent ideas to regulate us and others in the space, and say, can we do it in this way? This is how we see it’s working.

[00:21:21] Pritesh: The fact that you have been working on that infrastructure is some real intelligent forward thinking there in itself. We have a couple of questions I’d just like to put to you before. One of them is: as a corporate treasurer, what percentage of your FX is hedged and how far out?

[00:21:42] Thomas: Again, back to the business model of Saxo Bank, where we facilitate the investment and trading and savings for our underlying clients, we don’t take proprietary positions. Every time a client trades a product on our platform, it’s being routed directly to the market.

In essence, Saxo does not have any FX exposure at all. We also earn some fees and commissions and stuff in various grantees, there are being real time or on a me-time manner. We don’t provide lending to any clients like you would in a traditional bank or mortgages, so we don’t have any long-term assets and liabilities. We don’t have any FX risks, at all. But we provide our clients with the ability to trade everything, from spot to a very long forward bond.

[00:22:42] Pritesh: Another question that’s coming in is: how did COVID change the business?

[00:22:48] Thomas: Like everybody else in the trading space, we had a lot of successes from when COVID started, because people were sitting home, creating trading accounts, starting looking at the various options. We also had an enormous client intake and an enormous volume growth across all asset classes. That was of course positive for us on the client side.

In the Saxo Bank side, we were here in Denmark not very hard hit by COVID. After a couple of months, we were back in the office, most of us. But one thing that I realized while being away was, yes, it can provide some benefits for the employees to sit at home working, because of commuting and stuff like that, but if you are a technology company that needs to evolve and evolve fast, and always be the best, sitting together in the technology team and across departments and figuring out how to solve the issues, is much better when you sit together compared to when you sit on Zoom or Teams.

For me, it’s simply necessary to sit together most of the time, to solve these things.

[00:24:20] Pritesh: Our own product and strategy met last week in person, and I think we got about three weeks’ worth of work done in two days. We all recognize the importance of that.

Thomas, it’s been a real pleasure to have you on the webinar today. Is there anything else you’d like to tell our guests while we have you?

[00:24:39] Thomas: No. I would just say, if people have an interest in digital assets and the treasury, they are more than welcome to reach out to me on LinkedIn. I’m always happy to have a conversation on how to do things intelligently. I don’t know everything, but I love to get input on how to solve issues, especially this issue of traditional assets versus digital asset and how we solve that space and how we connect the two. It’s super important for the entire financial ecosystem. I’m happy to engage in discussions across many points of view.

I thank you for having me, Pritesh. It was an absolute pleasure. Talking about this, I can do for hours. Maybe another time again.

[00:25:27] Pritesh: Definitely. Thanks for joining us. Our next Talking Hedge will be in a couple of weeks’ time. Until then, wish you a great rest of your week. Thanks for joining us today.