Capitolis Turbocharges Novations with STP Initiative

Capitolis launched its Novations platform seven years ago – the only novations solution on the market – and has since developed a network of executing brokers, prime brokers, and clients. Today, it is announcing the next evolution of the platform: full straight-through processing (STP), in association with Société Générale and another messaging provider.

A key driver of the initiative was Luke White, head of FXPB for EMEA and APAC at Société Générale, who moved into the role a decade ago from the bank’s listed derivatives and Rates clearing business. “Moving into FX it was clear there was potentially a lot of operational risk that we wanted to reduce,” he observes. “One area that needed machine-operated STP was novations – in listed markets you could just close out a position, in OTC that was much harder and involved inefficient processes taking up to three-or-four weeks.

“Our DNA at SocGen is purely STP, we were the first to insist on all trades being submitted through the messaging framework, which was a pretty aggressive move 10 years ago but is now the industry standard,” he adds. “That is what we wanted to bring to the novations process.”

Another driver was the ANNA calculation under the Uncleared Margin Rules (UMR), the impact of which has increasingly been felt by the industry since introduction in 2016. White says SocGen had clients asking about reducing their exposures, and by association liquidity ratios and capital usage, through an early close-out process. “We looked at the problem, found two dominant providers in the space, one of which was Capitolis, who simply had to work with each other if we were to develop this solution,” he explains. “So we got them into the same room and worked out a structure that led to this STP solution involving both of them.”

Although SocGen was a key driver of the work, White is keen to stress that the solution is open to anyone – indeed he expects wider industry take up as word spreads This is echoed by Ben Tobin, co-head of market development for portfolio optimisation at Capitolis, who says, “The solution is in production and working every day, so we are talking to other asset managers and prime brokers about the benefits. The less checks people have to make the better, and there are still too many manual checks as it runs as a very piecemeal service.

“We have seen a 33% year-on-year increase in novated FX option trades,” he adds. “This has increased the pressure on operation teams at the executing banks, clients and prime brokers and this solution improves their efficiency and frees up resources.”

The key to the improved efficiency – and it is potentially a huge gain – is the interface between the dominant messaging provider and Capitolis. Effectively, the workflow at the tech providers has not changed, it just happens a lot quicker. The messaging platform feeds the trades to Capitolis, which has a constant algorithm running looking for novation possibilities (it also works on compression for FX forwards), when these are found, it sends instructions back to the messaging platform, for further downstreaming to the PBs’ systems and, eventually, the clients.

With an increasing number of clients concerned about shrinking pools of liquidity providers, one obstacle to a healthy ecosystem is being removed, or at least lowered

“Capitolis can still use complex and sophisticated methodologies to calculate novations and compressions, but it still only results in one of two things, either deletion of trades or new trade instructions – the way it has always been, it’s just going to happen a lot quicker.,” affirms White. “Other PBs are telling me they want to use it as soon as they can, which is what we want. This works for me at SocGen because the more PBs using it, the more commonplace it becomes in the industry, more executing banks start using it, and the quicker we can get rid of this inefficiency.”

By speeding up the process of novations (and potentially compressions), this solution has the potential to deliver a watershed moment to the FX industry. Participants can create a more efficient ANNA profile, as well as improve their liquidity ratios. They can also release recycled credit risk to option trades, thus fulfilling one of the core value propositions of novations and compressions, more room for the trading desks to actually trade.

There are other benefits as well. With an increasing number of clients concerned about shrinking pools of liquidity providers, one obstacle to a healthy ecosystem is being removed, or at least lowered. This in turn helps clients adhere to their best execution requirements, while retaining flexibility in how, and with whom, they execute.

The good news for the industry is the solution is live and operational, what is now required is scale – something Tobin says Capitolis is working on. “This is an ongoing education and we are working on that,” he explains. “A lot of asset managers have never done a novation before, so they need to understand the benefits and that it is really just a new platform and process. Several have approached us to discuss how it would work for them and we have an outreach programme – that will help drive momentum.”

Momentum, should come, after all if a new process involves straight-through processing there is less for the teams involved to learn. White says being involved has been “a rewarding process” even though the benefits are squarely aimed at the industry, rather than just SocGen. That said, he also observes that the bank will be an equal recipient of those benefits, notably, “increased volumes and levels of business; happier clients; and a more efficient operational environment”.

In a world where efficiency is so vitally important, and financial and operational resources are stretched thin, such a result would indeed be a benefit to the entire industry.