To provide access to credit for individuals

To offer swaps across multiple asset classes

To create fungibility between non-fungible swaps

To provide cross-margining and margin financing to market makers

To aggregate liquidity providers and achieve tighter bid-offer pricing

They can attract more liquidity providers

They can provide cross-margining and margin financing

The need for a centralized limit order book

The desire for traditional retail brokers to also provide custody services

The conflicts arising from ownership of exchanges by other companies

The lack of counterparty credit risk in the market

The increase in demand for intermediaries

The shift from pre-funding to off-exchange tri-party solutions

The emergence of new names in the custody space

To facilitate cross-margining and margin financing

It makes the market more dangerous for participants

It provides a safer environment for trading

It allows for the mixing of market maker practices

Cross margining and margin financing across regulated futures and options

The ability to trade Bitcoin and ETH on the CME

The opportunity to scale up the cash carry trade

Institutional adoption and retail liquidity

Institutional adoption and growth in futures options and swaps

The convergence of retail and institutional markets

The adoption of triparty custody solutions

The reduction of counterparty credit risk

Offering cross-margining and margin financing

- The podcast features an interview with Mike Higgins, the CEO of Hidden Road, a global credit network for institutions that offers prime brokerage, clearing, and financing for various asset classes, including digital assets.
- The discussion covers topics such as the digital asset market structure, the launch of Hidden Road's new product called Route 28, and the future of the institutional market.
- Mike Higgins shares his background and how he came to work at Hidden Road, highlighting his experience in electronic trading and foreign exchange markets.
- Hidden Road is focused on resolving credit constraints for trading firms and has built a multi-asset prime brokerage and clearing business.
- The company has extended its platform to support digital assets based on client demand and research, filling a gap in the market for institutional access to the digital asset space.
- The podcast also touches on the challenges faced by banks in playing in the digital market and the regulatory approach taken by Hidden Road, which has obtained regulatory licenses and registrations from various authorities in the US, UK, Europe, and Asia.

- The speaker believes that regulations are necessary for institutions to access the digital asset space and compete with other financial markets.
- They express concern about trying to fit this new asset class into existing traditional financial regulations and advocate for creating new regulations that capture the unique nature of digital assets.
- The US accounting body, FASB, is expected to finalize an accounting standard on cryptocurrencies by the end of the year, which is significant for institutional permanency in the space.
- Hidden Road aims to solve credit risk and challenges around vertical integration of exchanges in the digital assets space by providing institutional-grade infrastructure for clients.
- The digital prime brokerage offering helps institutions remove counterparty credit risk, improve capital efficiency, simplify workflows, and provide certainty and finality in trading and settlement.
- The speaker mentions the pre-funding problem in the market and the need for efficient pricing of venue risk for third-party capital to enter the market.
- Route 28 is a synthetic prime business that offers swaps across multiple asset classes, including digital assets, and was developed in response to client demand for a regulated product in the digital space.
- The speaker highlights the value proposition of Route 28 in providing capital and cost-efficient ways for institutional clients to trade regulated products in the digital space and remove counterparty risk.

- The Hidden Road Protocol (HRP) aims to standardize swaps and create fungibility in the market, reducing counterparty risk.
- Route 28 allows for aggregation of liquidity providers, resulting in tighter bid-offer pricing and lower execution costs.
- Market makers can quote to clients via Route 28 and hedge on crypto exchanges or over-the-counter (OTC) markets.
- The market structure for digital assets is expected to evolve, with a separation of trading and asset holding functions.
- The demand for an intermediary and viable off-exchange tri-party solutions is increasing.
- Hidden Road is working with CME to offer cross-margining and margin financing across various CCPs and OTC markets.
- The market is expected to see institutional adoption and growth in derivatives products.
- The potential introduction of Bitcoin spot ETFs may further drive institutional participation in the market.

- The growth of derivative products in the cryptocurrency market will require proper regulated infrastructure.
- Institutional adoption of cryptocurrencies will be accelerated with regulatory clarity and involvement from banks.
- There may be two markets in the cryptocurrency industry - one regulated and one unregulated.
- Retail consumers are likely to prefer trading in a regulated environment, but infrastructure needs to change for institutions to enter the market.
- Regulations will drive the majority of the cryptocurrency business onto regulated infrastructure.
- Hidden Road focuses on expanding the credit network and solving problems in the PB clearing and financing space.
- To learn more about Hidden Road, visit their website hiddenroad.com.

- The podcast features an interview with Mike Higgins, CEO of Hidden Road, a global credit network for institutions offering prime brokerage, clearing, and financing for various asset classes, including digital assets.
- Topics discussed include the digital asset market structure, the launch of Hidden Road's new product called Route 28, and the future of the institutional market.
- Hidden Road aims to resolve credit constraints for trading firms and has extended its platform to support digital assets based on client demand.
- The company has obtained regulatory licenses and registrations from authorities in the US, UK, Europe, and Asia.
- Hidden Road's Route 28 provides capital and cost-efficient ways for institutional clients to trade regulated products in the digital space and remove counterparty risk.
- The Hidden Road Protocol (HRP) aims to standardize swaps and reduce counterparty risk.
- The market structure for digital assets is expected to evolve, with a separation of trading and asset holding functions.
- Hidden Road is working with CME to offer cross-margining and margin financing across various CCPs and OTC markets.
- Institutional adoption of cryptocurrencies will be accelerated with regulatory clarity and involvement from banks.
- Hidden Road focuses on expanding the credit network and solving problems in the prime brokerage clearing and financing space.

Today on the podcast, I sat down with Mike Higgins, the CEO of the International and Digital Asset Businesses at Hidden Road.

Hidden Road is a global credit network for institutions that provides prime brokerage, clearing and financing across a number of asset classes, including digital assets.

On today's podcast, we discussed the digital asset market structure.

We talked about the launch of Hidden Road's new product, Route 28.

We talked about where the institutional market is going and what it'll look like a year from now.

So without further ado, here's my conversation with Mike Higgins of Hidden Road.

Matt Walsh and Nick Carter are partners at Castle Island Ventures.

All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures.

Guests and hosts may maintain positions in the assets discussed in this podcast.

You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion.

This podcast is for informational purposes only.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated.

The federal government loans American International Group AIG 85 billion dollars.

This is a different kind of market and the Fed is asleep.

The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the 2 mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing.

You print a couple trillion dollars and all of a sudden people start to worry.

So out of this worry, we have something called the Bitcoin.

Mike, I am excited to have you on the podcast.

As an investor in Hidden Road, you would not believe how hard it is to get people from Hidden Road to come on your podcast.

So glad we were able to convince you to come on.

And before we get into all the exciting things that are happening at Hidden Road in the trading ecosystem, let's just hear about your path and how you actually came to work at Hidden Road and what the story was.

So quickly, by way of background, my name is Mike Higgins.

I'm the CEO of the International Businesses and Global Head of Business Development at Hidden Road Partners based in London.

As folks are likely aware, Hidden Road's a multi-asset PB and clearing firm that was set up and funded by the buy side.

We launched that business just shy of 5 years ago, starting with a series of PB and clearing businesses, traditional markets.

Pretty early on, we were asked by our institutional clients to extend the PB platform to support digital assets.

The digital PB business was put in production about 2 and a half years ago.

We currently clear out material percentage of the global crypto market.

But quickly, back to my background, Matt.

Prior to joining Hidden Road, I spent just shy of 20 years in electronic trading, multi-asset, and the bulk of that in the foreign exchange markets.

Originally from New York, where I started my career down in Wall Street.

Then in 2009, I was transferred to London to acquire an option business.

Thought I'd be home in 6 months, but life had a different plan, married, kids, and now permanently reside in jolly old England.

I do still have my return ticket, Matt, but given it's been a few years, it's likely expiring by now.

Given the regulatory approach, you should just stay over there.

But after completing the acquisition, instead of moving back, I was asked to join a joint venture between Credit Suisse, Bank of New York, Mellon, and Forex Capital Markets, where I was working at the time.

That was the launching of FastMatch FX, which we built into 1 of the largest matching engines in FX, later sold that off to Uranex.

It was late 2018 when I was syncing up with Mark and Joe, who were in the process of putting together the framework of what is Hidden Road.

When Mark started to explain what the focus of the firm was, which was ultimately around resolving credit constraints that many trading firms are having, I was thinking with my trading ad on, I'd quickly understand that opportunity and thought I'd be a PB client.

They seem to have a different idea, which was to help me join and lead the efforts on the BD side.

So wrapping up here, my role is focused mostly around strategy.

I'm in charge of the sales, marketing, and distribution for the firm globally.

A big part of the role is the research and development side and ultimately Matt, it's through extensive listening to our clients and understanding the problem sets that we build products.

We don't take the field of dreams approach and build something blindly and hope that they will come.

We care about what our clients need and want and build based on that demand.

And so far that strategy served us and our clients well.

2 good examples of that is our digital business and the launch of our swaps business called Route 28, which hopefully we'll get into today.

Now was crypto and digital assets even on your radar when you first started talking to Mark and Joe about Hidden Road?

I think it was always there, just got accelerated as our clients came on the platform and really wanted to get into that space.

But Hidden Road is really a purpose built multi-asset PB and clearing firm.

Let's set another way, Matt, it's a global credit network for institutions.

We provide access to credit across the platform.

And so over the last 5 years, we've been busy writing a horizontal clearing infrastructure using modern technologies and techniques from high frequency trading and bolted that into a clearing business.

I think that's important as allows us to have a holistic, real time view of a counterparty's risk, cross asset, cross product.

So fully focused on PB clearing and margin financing.

We don't have any conflicts of interest with our clients.

We don't run any sort of trading desks, no propositions.

Really we focused on innovating the onboarding process and help remove that long, opaque, arduous process of opening PB accounts that you find in legacy providers.

We saw the opportunity to start in foreign exchange prime brokerage a few years ago and give our clients access to our credit to trade with all the major banks, the non-banks and the ECNs.

So in effects, we're 1 of the fastest and largest PBs in the space, clearing tens of billions a day.

Next up was listed derivatives, but the clients came to us and asked us to build the digital PB platform.

And so based on their feedback and our research, it was abundantly clear there was a gap in that space for institutions to access the market properly, and extending our platform would ultimately help bridge that gap.

And so now we're back in launching the list of derivatives side, the swaps business, but to kind of end off here, we run a global, highly regulated multi-asset PB and clearing business.

We're about 150 people globally, and again, focused on trad 5 PB and digital asset PB.

The digital asset piece had to have been so interesting in the early days as someone that came from traditional financial services, when you first started to look at just how this works and all the exchanges and how credit works in the system, it must have been pretty jarring to just see the market structure so immature.

Exactly, there was certainly an immaturity to it, But I related back to foreign exchange in the 90s pre-PB.

There was counterparty risk and settlement risk or Harris that risk across the system.

And so that really limited the scale of that market and who can participate in that market.

If you looked at a parallel 2 foreign exchange and fast forward, PB has helped that market scale prior to PB was around $680 billion a day in spot fast forward In the latest BIS report, it was around 1.2 trillion.

So the market has matured and participation broadened.

And I think digital with a PB and it will look pretty similar to that.

Now, what is it about PB that makes it really hard for the banks to play in the digital market?

And then what's happening in the FXPB space?

Because obviously the banks seem to be retreating in some cases from that market as well.

In general, prime brokerage and clearing inside of a bank is sub 5% return on invested capital.

It's legacy technology and they're hit with RWA and capital charges.

So structuring and spinning this out of a bank was important for the firm to do it.

Specifically for banks coming into digital assets.

There's a number of challenges for those reputational issues.

The banks were bailed out by the regulators in 2008, and so they absolutely are trying to stay clear of any issues there.

But digital assets is currently 100% RWA haircut under B3 or Basel III.

And so that crushes any economic incentive for the banks that currently access the space.

In foreign exchange, BB, the criteria has just kept increasing.

And so some of the largest banks have puked that out, giving us the opportunity to step in that space a few years ago.

It's a really fascinating approach when you just cut out the middleman in some of these businesses due to regulatory.

I know this is a complicated business to operate from a regulatory perspective, a lot of different jurisdictions.

So what's been the approach for Hidden Road on the regulatory front?

So I think if PB and clearing is really a trust business and part of building trust, PB needs to be transparent.

They need to get audited and they certainly not need to get regulated.

Needs to get regulated by tier 1 regulators.

So at Hidden Road over the past 5 years, our team has worked hard with local regulators to get a series of entities regulated.

For example, in the US with the newest FCM GCM on the CME and decades with oversight from the CME, the CFTC and the NFA.

In the UK, we're regulated by the FCA, the license to offer derivatives.

In addition, we're uniquely positioned as the only credit intermediary that I'm aware of that also has a digital assets registration from the FCA called AML D5.

In Europe, our Dutch entity based in Amsterdam is regulated and registered with the AMF and also has a digital asset registration with their central bank called the DNB.

In Europe, that's a major advantage with MECA coming in place.

In short, MECA helps harmonize the regulatory framework for crypto asset markets across the entire continent.

In Asia, Singapore is our hub, currently in process of applying for a license with the MAS.

But look, with regards to regulations, I think it's really needed to provide the certainty for institutions to access the digital asset space and allow it to compete with equities, fixed income, foreign exchange commodities.

My fear though, Matt, is that we try to shoe horn this new asset class into existing trad fi regs.

And really we have the opportunity to create something new and capture the unique nature and breadth of this asset class across DeFi, NFT, stable coins, crypto coins.

And so it's early on, we're barely out of the first inning, but I do think we're starting to see regulations take shape around the world.

And I'll leave you with 1 thought on the regs and a good example of where we're going.

The US accounting body, FASB, have instructed their technical departments to finalize an accounting standard on cryptocurrencies.

This is huge news on an area that was previously subjected.

There's no massive divergence to what's currently being done today, but the move to codify this into an accounting standard is significant as there's an expectation of institutional permanency in the space.

So what's interesting about that is that it was a 7 to nil, if you will, my English term, unanimous board decision.

And really, it's the speed of the issuance.

After 5 months of public comments, this is being pushed in production.

And so it's exactly these types of bodies and regulations that need to come into effect for the market to properly scale and to allow participation in the space to broaden.

So maybe just going a step deeper into the digital business, I don't want to be biased, but I think this is the most exciting part of the business, at least to me, because it's just a totally wide open space.

And as I see this market developing, it's just pretty clear that PB services are going to be essential and none of the banks are going to play here for the foreseeable future for some of the reasons you talk about.

And I would say there's just some very acute issues around things like exchange prefunding and just discrete issues that are unique to the crypto space.

So maybe just talk about what the problems are that you guys are solving for your customers in that digital business.

Matt Cormack I echo everything you said though, Matt.

So Hidden Road has been calling out 2 issues when we first were looking at the digital assets space.

First is that there was this credit risk in the system that wasn't being valued or priced correctly or priced at all.

And second, there were major challenges around the vertical integration of some of these exchanges.

And so the answer for clients to come into space was really to build institutional grade infrastructure to allow clients to access in a safe and a capital and a cost efficient way.

And so Credit providers or prime brokers like Hidden Road were experts in underwriting counterparty risk, managing liquidity, that's liquidity on our balance sheet, pricing term liquidity and setting appropriate venue limits.

So the goal of the digital PB offering is to help institutions remove counterparty credit risk by onboarding and facing a well-known, well-established, well-capitalized, highly regulated entity, help eliminate the need to onboard and post collateral inefficiently with dozens of exchanges and trading partners, to become much more capital efficient by benefiting from portfolio margining and netting across all the digital activities a firm would trade that's on exchanges, OTC and now regulated futures and options.

And to simplify the workflows and remove complexities that exist in crypto around compliance and settlement and treasury and operations, et cetera.

And finally, Matt, 1 of the goals was to improve on the legal documentation and bring that up to the level of industry standing of PB and clearing and to provide the certainty and finality of when trading and settlement occurs.

You did mention that and maybe I can talk a little bit if that's all right around the pre-funding problem.

Okay, so the structure of that market when it was originally set up the way we understand it was really designed with retail in mind.

So the vertical nature of these exchanges is problematic for institutions for a number of reasons.

The idea that the exchanges are running a marketplace while also custodying the assets of its users and in certain instances running internal market makers is frankly mind boggling and didn't work out too well all the FTX.

And so before a PB existed in the space, clients would need to bilaterally fix and collateralize and settle with every exchange and counterparty they train, Making it really capital inefficient and capital intensive.

So the way you address that liquidity issue is to allow third party capital into the market as intermediaries and leverage providers exactly like you have in tradfi.

But to repeat in order to do that the venue risk needs to be efficiently priced.

And then credit providers like Hidden Road can enter that space with real size to fulfill the role of providing capital and efficient products and services.

And so, PBs will help improve the capital footprint for institutions across the spectrum of trading destinations.

Specifically on the OTC side, Matt, there's a huge opportunity to improve capital efficiency there.

Definitely capital efficiency for trading related firms.

I also wonder if just retail brokerages in the US and abroad, eventually we'll just see this as just a much better mousetrap versus having disparate connectivity to liquidity providers, having 20 different wires to settle at the end of every day.

Why wouldn't you just wanna have 1 source to handle it all for you.

If you're a retail broker, you have a fiduciary responsibility to your end clients to deliver best price and best execution.

And 1 of the ways that's done in traditional markets is by having a single credit provider that allows you to scan the market and trade on the best price.

So lacking a prime broker you need to establish bilateral counterparty risk with every 1 of those entities.

And that may not fit your credit appetite even though they have the best price in the market.

And so accessing a prime broker ultimately will allow those retail consumers to aggregate liquidity, drive down tighter bid offering and deliver a better product to the end user, which really is the retail consumer.

things I'm really excited about, and I guess by the time we release this podcast, I think you guys will have gone live with this and promoted it a little bit, but Route 28.

So talk about what this is, what the value prop is, how you guys even came around the insight around the opportunity to launch this product?

Yeah, we're definitely excited about this 1.

And again, it really comes from client demand.

But Route 28 is the name of our synthetic prime business that offers swaps across multiple asset classes, including equity, equity indices, commodities, FX rates, and digital assets.

The product is something that the firm has been working on since its inception.

Jeez, Matt, time flies when you're having fun, I guess.

As folks are likely aware, the market for swaps represents around 80% of global derivatives traded which is in excess of hundreds of trillions of dollars.

They're more efficient and easier to trade than underlying spot products themselves.

And 1 of the many benefits is that swaps can easily be customized or tailored to meet a wide variety of market participants.

And that's exactly the flexibility the clients at Hidden Road are looking for.

So in addition, they're highly regulated and institutions understand how to trade these things, how to book these things, how to report them and handle them from a legal and tax perspective.

So we've had constant demand from our clients to get something rolled out, but the recent motivation is actually from the digital side.

As mentioned earlier, our digital PB business was launched to meet the demand we had from existing clients who really needed that institutional grade infrastructure to enter the space.

So quickly, that business was clearing billions of dollars a day across spot, crypto, perpetual swaps and futures.

But with the many blow ups that have gone on in crypto over the last few years, our clients came back to us and said, basically enough is enough.

We really need to move this into a regulated environment with a regulated product.

So we started looking at how we would build this out.

And it was clear that we had all the regulatory licenses to offer the regulated swaps.

We were actually set up to handle all of the reporting obligations, reporting to the repositories like DTCC and Univista.

But as a PB, we really didn't have that front end platform for clients to interface with swaps.

So the timing happened to coincide with the launch of CrossX, which is a spot crypto ECM, that HRP is the PB behind.

So we called those folks and said, what would it look like if we took an instance of your matching technology, levered that with our regulatory license and offered a series of derivative products to the end clients.

And so that's the origins of how Route 28 has come to be.

But Matt, maybe I should dig in a little bit more around the value props and specifically on the digital side.

Yeah, I'd love to talk more about the digital side.

It's 1 of these interesting categories where I became aware of perpetual swaps in the digital context with BitMEX.

See all Unknown transcripts on Libsyn

On The Brink with Castle Island - Mike Higgins (Hidden Road) on Digital Asset Prime Brokerage (EP.464)