Tranched Value Security (TVS)
In the recent 50 or so years, financial market didn’t see virtually any innovation. Only the technological solutions dominated the headlines of the news. Technology has given many promises to make the Earth the better place and financial markets more efficient, but the existing trends just worsened – rich got richer, and poor got poorer.
The only issue was that people were trying to solve the symptoms of the problem, but not the problem itself. The problem was, and currently is that the common people do not have access to the same financial opportunities as the elites of Wall Street, as the oligarchs, and the professional funds. The common story is that they don’t want you to invest in something what has a possibly high risk, but as a rule of thumb “higher risk, higher return”…
While we were observing the markets and all the financial opportunities out there, we saw many inefficiencies and new opportunities for the fundamental change of finance. Not the new fancy looking app or software, but the core innovation – new financial products. That means they are applicable not only to a specific segment of the market, such as Bitcoin, cryptocurrencies, or stocks, but they are applicable to all assets! Yet, it’s our strategic choice to start with the cryptocurrencies, and later to roll out to the other assets.
The first innovative financial product we developed and already launched is Tranched Value Security (or TVS for short).
We recommend you watching our short explainer first before digging into more details ;)
You can trade cryptocurrencies on as.exchange through a new, innovative type of contract called Tranched Value Security (TVS) which is aimed at transforming the underlying spot asset performance in a way that investor has a complete control over the possible results. This product might have or might have no expiry date and is able to significantly magnify the underlying performance, while able to assure that investor’s holdings do not drop in value while the underlying market declines.
The product suits traders who prefer to hold positions for a long and short time and do not want their positions to fluctuate in value due to large swings in basis, or aim at exploiting expected price movements without using leverage, which is subject to additional fees and puts more risk on investors’ capital.
How does it work? Quite simple! Imagine that you have one Bitcoin (assume the price is $6,000) and issue 2 TVSs backed by it – Senior TVS, and Junior TVS. Each TVS can have a value claim of 50% of market price of Bitcoin, or 50% x 6,000 = $3,000, and minimum $3,000. So far, they are same, right? Yes, and here innovation would step in, if there’s no additional feature for each TVS (be it Senior or Junior) to claim value share of Bitcoin, a higher level TVS’s claim must be satisfied first (in this case Senior is the most and only senior tranche). So, it means that before Junior TVS can make a claim, Senior’s must be satisfied first.
In such a simple setup, see below what happens: When the price declines, Junior tranche loses first. However, when price starts increasing afterwards, Junior is compensated by magnified return. At the same time Senior one does not decline below its minimum value, unless the value of underlying is completely wiped out, but still earns positive return when Bitcoin goes up.
Advanced terms and explanations of TVS
| Tranched Value Security (TVS) |
Asset Backed Security (ABS) |
Perpetual Swaps |
Options | Forwards | Futures | |
| Backed by | Value of individual or pool of assets / cash-flows | Pool of assets / cash-flows | Value of individual asset | Value of individual asset | Value of individual asset | Value of individual asset |
| Underlying types | Any | Private assets | Publicly traded assets | Publicly traded assets | Publicly traded assets | Publicly traded assets |
| You control risk | ✔ | ✖ Once purchased, risk cannot be controlled |
✖ Requires active trading to control risk |
✔ | ✖ Requires active trading to control risk |
✖ Requires active trading to control risk |
| You can outperform market | ✔ | ? Depends on purchased security |
✖ Depends on trading skills |
✖ Depends on trading position |
✖ Depends on trading skills |
✖ Depends on trading skills |
| Transform asset performance | ✔ | ✔ | ✖ Duplicates performance of underlying |
✔ | ? Typically magnifies performance of underlying |
? Typically magnifies performance of underlying |
| Preserve capital in falling markets | ✔ | ✖ Might signify losses |
✖ Might signify losses |
? Depends on contract type and investment strategy |
? Depends on contract type and investment strategy |
✖ Might signify losses |
| You might get liquidated | ✖ | ✖ | ✔ | ✖ | ✔ | ✔ |
| Predictable earnings | ✔ | ✖ Unpredictable earning patterns |
✖ Unpredictable earning patterns |
? Predictable but complicated earning patterns |
? Predictable but complicated earning patterns |
? Predictable but complicated earning patterns |
| Easy to calculate | ✔ | ✖ Complicated computations |
? Requires forecasting underlying |
✔ | ✔ | ✔ |
| Execution costs | ✔ | ? Execution costs can be significant |
✔ | ? Execution costs depend on underlying |
? Execution costs can be significant |
✔ |
| Appeals to retail investors | ✔ | ✖ Not available for retail investors |
✔ | ✔ | ✖ Generally, not available for retail investors |
✔ |
| Appeals to market-makers | ✔ | ✖ Maybe difficult to execute quickly and at favorable price |
✔ | ✔ | ✔ | ✔ |
| Appeals to financial institutions | ✔ | ✖ Not a good hedge for most of the risks |
✔ | ✔ | ✔ | ✔ |
| Appeals to portfolio managers | ✔ | ? Appeals only to specialized portfolio managers |
✔ | ✔ | ✔ | ✔ |
| Transparency and price discovery | ✔ | ✖ Limited public information |
✔ | ✔ | ✖ Limited public information |
✔ |
| Customizability | ✔ | ✔ | ✖ Standardized contracts |
✖ Standardized contracts |
✔ | ✖ Standardized contracts |
The underlying represents an asset, cash flow, or anything that has a determinable value and / or price. Underlying asset can be a physical asset, financial security, derivatives contract, futures, option, index, currency (FX), digital currency (Bitcoin), swap, measurement, etc.
The variable value share (VVS) represents the share of underlying that the particular value tranche (TVS) can claim based on the asset price. Each TVS can claim either the VVS or Fixed Value Share, depending on which of them maximizes the value of TVS, given that the claims of the more senior TVS have been fully satisfied. Variable value share is represented in percentage terms on as.exchange.
The fixed value share (VVS) represents the pre-defined value of underlying that the particular value tranche (TVS) can claim irrespective of the asset price. Each TVS can claim either the variable value share or FVS, depending on which of them maximizes the value of TVS, given that the claims of the more senior TVS have been fully satisfied. Fixed value share is represented in dollar terms on as.exchange.
In the context of Tranched Value Securities, seniority refers to the level of subordination of the particular value tranche that defines the order of payment to security holders in the case of underlying value decline.
Underlying Reference Price (URP) is the price of the underlying of the TVS contract. URP is publicly observable or consent price or measure from which Tranched Value Security derives its price. The URP is the “closing,” “final,” or “settlement” price for the specific period of time – for minute, hour, day, etc. The URP is an important measure for pricing TVS contracts as it’s generally publicly observable, transparent, easy to use and obtain, and is widely disseminated to all market participants.
A counterparty on as.exchange is the other side of your trade, depending on which side you took or wish to take. If you are the seller, your counterparty is the buyer, and if you are the buyer, your counterparty is the seller. On as.exchange we minimize your counterparty risk by implementing escrow mechanisms and advanced trade dispute procedures to ensure fair and efficient transaction execution.
The attachment point (AP) defines the amount of subordination of the particular value tranche. It measures by how much the underlying needs to decline in price, in order for particular value tranche (TVS) to start losing in value as well. Once the AP is reached, the particular (current) TVS starts losing in value.
The detachment point (DP) is the point of exhaustion for the particular value tranche. It measures by how much the underlying needs to decline in price, in order for particular value tranche (TVS) to lose all market value and turn into zero-value tranche. Once the DP is reached, the subsequent (more senior) TVS starts losing in value.
This is the easiest TVS unwinding method which implies that the trading counterparty agrees to terminate the contract. To do so, the seller needs to transfer the present value of the contract to the contract buyer. This transaction assumes that the contract will last until maturity without a credit event occurring. This assumption is, typically, unrealistic since the value default is still possible. Therefore, to account for the positive probability of default, the present value is calculated with a discount rate that reflects the default risk. In the context of as.exchange this is effectively a selling of the initial TVS contract to the as.exchange with discount to market price.
This TVS unwinding method assigns the trade to a third party. Under this method, the investor would receive the present value or market price of the contract from the assignee with the original terms of the contract remaining in force. This is effectively a selling of the initial TVS contract to a third party through the as.exchange.
This method involves entering into an offsetting position with another counterparty. To perfectly hedge the remaining value share, the investor needs to sell a contract which is netting all value fluctuations to zero. This is effectively a purchase/sale of offsetting TVS contract from a third-party via as.exchange.
