Best compression/optimisation service for FX: Capitolis

As new metrics to measure counterparty risk have taken effect across the financial industry during the past year, the demand for solutions to minimise overall counterparty exposure has increased considerably.

And with FX derivatives activity being overwhelmingly directional and primarily uncleared – and thus more capital intensive – demand for trade compression among market participants with substantial FX businesses is much higher than in other asset classes.

In the past year, Capitolis, the technology company reimagining how capital markets operate, has seen record participation numbers for its compression services and thus far the firm has reduced more than $1 trillion of standardised approach to counterparty credit risk (SA-CCR) effective notional for its clients since the new risk metric was introduced.

Gil Mandelzis, founder and chief executive of Capitolis, says the change from the current exposure method to SA-CCR has been a game changer for the FX industry. He says that the demand for compression services was rising before the switch to SA-CCR but the pace of change accelerated when the new risk metrics came into force in many jurisdictions. For Capitolis, this step change has provided great opportunities for its services.

“SA-CCR is huge. It has a dramatic effect on capital and really impacts directional positions and the overall activity of our clients,” explains Mandelzis.

“It doesn’t affect all banks in the same way and certainly not at the same time. That’s why we’re working on expanding our network and solutions to address their needs.”

As such, during 2021 Capitolis bolstered its team across all of its activity sectors as well as reinforced its management board. In 2022 the company raised $110 million in a Series D funding exercise and partnered with risk management company Acadia to launch an FX-specific SA-CCR optimisation solution. It also acquired technology provider LMRKTS to supply banks, asset managers and hedge funds with the most complete trade compression offering available.

“Capitolis traditionally focused on bilateral compression runs, but we wanted to add a multilateral compression capability to our business. LMRKTS’s know-how, technology and people are super complementary to us,” says Mandelzis. “With our fantastic team, meaningful resources, ambitious growth aspirations and great partnership with banks and the community, the acquisition of LMRKTS was a match made in heaven.”

With LMRKTS now fully integrated into the Capitolis workflow, Mandelzis says the collaboration of the combined teams has worked far better than his wildest expectations. The collaboration manifested itself remarkably well when market participants asked Capitolis to help settle their ruble exposure following Russia’s invasion of Ukraine in February 2022 because their access to Russian banks was effectively cut as sanctions were applied.

In short order, Capitolis was able to design a bespoke solution that allowed FX banks to reduce their large exposures to the ruble and, in doing so, strengthen their financial soundness and stability.

“As the invasion was taking place, the industry reached out to us to help them reduce their ruble exposure,” said Mandelzis. “Within three days we had 11 banks that were ready to roll. We’ve done two runs a month since and we now have 17 global banks participating on a regular basis.”

“We also decided to donate half of our revenue from the initial run to humanitarian and Ukrainian-related causes, which we’re very proud of and very passionate about.”

While Capitolis intends to continue ruble compression runs for as long as required, Mandelzis points out that working with the industry in this problem-solving exercise piqued the firm’s imagination. Backed by a strong balance sheet and strong aspirations, the firm is well positioned to expand its solutions offering and widen its client base.

“We’ve meaningfully grown our overall headcount and are investing tonnes in technology and on expanding our network,” concludes Mandelzis. “There’s a lot of innovation that we’re working on in this space, which I’m super excited about.” 

 

Capitolis was voted Best compression/optimisation service at the 2022 FX Markets e-FX Awards.

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