Capitolis Advances FX Options Novation Efforts

With 2023 rapidly becoming the year in which FX market participants really started to pay attention to the capital footprint and impact of regulation, optimisation and novation technology provider Capitolis has reinforced the sense of change. It says it now has onboarded most major buy-side and sell-side market participants to its Novations platform with over 50 market participants utilising it.

With its Novations platform, the only FX novation platform on the market, Capitolis says is well-positioned to observe increasing interest, and the firm says its ability to drive efficiencies, safely expand execution opportunities within the FX market, and further reduce participants’ risk and capital footprints is gaining traction.

Capitolis CEO and founder, Gil Mandelzis, points to three key drivers of the growth in novation; increasing interest and involvement from the buy-side, existing clients becoming even more involved, and a group of new banks, both prime brokers and executing banks, joining the platform. “The great thing about our Novations platform is it’s not just focused on the dealer-to-dealer world but the dealer-to-client as well,” he explains. “Historically, optimisation has been focused on the D2D side but Novations is a meaningful tool that addresses the D2C side as well.

“Clients are more interested in, and sensitive to, the hygiene of their books,” he continues. “They want to reduce pin risk and have a variety of other motivations to reduce their capital footprint with the banks. This pressure from the buy-side has created a push and pull scenario – the Basel endgame and general focus on optimisation on one hand, and sophisticated clients looking to optimise for their own reasons on the other hand.

“There is also a third contingent that slightly overlaps, in that sophisticated clients understand that matters that may currently be the banks’ problems will become their problem as well over time – and they want to respond to that now,” Mandelzis adds. “These clients are thinking about the health and structure of the market and they would like to optimise wherever possible.”

The core of the Capitolis Novations platform is how it automates the once manual novation process for all participants, including prime brokers, executing banks, hedge funds, and real money managers, enabling them to optimise FX options portfolios. As Mandelzis notes, while the final Basel endgame regulation is still under review – they remain proposals at this stage – “there is very likely to be an emphasis on gross notional and G-SIB rankings, and Novations specifically gets rid of unnecessary and uneconomic gross notional”.

While Mandelzis is keen to stress that “tremendous progress” has been made and the company has strong momentum already, having novated over 105,000 trades and reduced $17 trillion in Gross Notional to date, it continues to work on improving its novation solutions, driving automation, and reducing response times.

“Novations will become an even bigger asset to the FX industry as the pressure on balance sheets and financial resources inevitably grows”

Capitolis has worked alongside participants to reduce response times by more than half already this year, something that Mandelzis puts down to a combination of factors. “From a technology and workflow perspective there has been a lot of work on streamlining, and more participants are now going directly onto the platform and are using it and that is very helpful,” he says. “We have also introduced reports that are continuously shared that provide firms’ response times on a relative and absolute basis, and that got people focused because they are being asked by their clients about just that. The clients have also been much more proactive and so have we in terms of our support team.”

Momentum certainly appears to be with Capitolis’ novations service, while the headline act is always likely to be the capital and technology efficiency gains, there is also the fact that more FX options are being traded. In April 2018 – the year the firm first planned its novations service, the four largest FX centres in the world executed just under $220 billion per day in notional terms. Roll forward five years and that number has grown by almost 25% and anecdotally continues to grow.

This should mean more interest from an expanding group of participants in the benefits of novation and Mandelzis is confident Capitolis is ready. “We have many more enhancements on the way – our agency service that we launched earlier this year for example solves a very complex problem and while it will take time to gain traction, it will build critical mass – and we continue to grow our network of bank and non-bank participants on the platform,” he says. “Novations will become an even bigger asset to the FX industry as the pressure on balance sheets and financial resources inevitably grows because it is a great tool that addresses key concerns directly.”