Capitolis Launches Fast-Track Novations Technology

We are all used to reading and hearing about the importance of speed in FX markets, but a new launch from Capitolis promises to introduce the concept to a vitally important aspect of the market – and into the bargain, meaningfully reduce the time and resources required by banks, prime brokers, hedge funds and asset managers to optimise their balance sheet and capital usage.

Not too many years ago, the novation process could have taken up to six weeks to complete, as market participants worked through the onerous processes required to agree the details. This has been chipped away by Capitolis to the point where it currently sits around three to six days. Now, Capitolis, with the introduction of its fast-track novations technology for FX options, is claiming a first for the industry – and a huge leap forward – by accelerating the workflow to a same-day process, close to real time.

“Our novations service has been growing at about 25% per year as we have brought this process down to days, but we continue to think outside the box and wanted to chip further away at the problem,” observes Gil Mandelzis, CEO and Founder of Capitolis. “So, we took a step back and looked at the problem, and we believe that over 70% of novations could actually be agreed upon instantaneously, thanks to improved technology and processes.”

The starting point for the new accelerated service is tear-ups, which represent a significant amount of the novation traffic on the Capitolis platform. “A lot of novations involve trades that are in and out with the same executing broker. Our technology means we are able to complete these novations in a second – all we needed was the right technology, and the approval of all parties to get it done instantaneously.”

Capitolis went live with fast-track novations with a small number of clients and prime brokers, meaning, Mandelzis says, it has been thoroughly tested, which has enabled the firm to go live across its client base. One of those clients is Barclays, for whom, Craig Robertson, MD of liquidity financing, says, “As part of our broader industry commitment to lead efficiency in the financing and clearing industry, we welcome this new process to significantly reduce the time and resources spent on this important FX prime brokerage process.”

“We now look forward to taking our network to the next level by getting as close as possible to near real-time novation processing and completion”

On the back of the broader release of fast-track novations, Mandelzis says Capitolis is starting to look at a concept called desk transfers, which will see trades with the same EB and PB joined by trades where there are no credit support annex (CSA) mismatches. “The idea is to deliver a process in which the novations are completely agreed by the technology, or, as some clients prefer, they are executed with one click after the client has verified the details,” he explains.

The key to accelerating these critical processes has been ongoing work by Capitolis to speed up response times. “Quicker response times has been at the heart of our work,” explains Ben Tobin, head of Europe at Capitolis. “We have worked closely with the industry, both sell-side and buy-side to get valuable feedback.

“Our drive has been to get rid of emails entirely and get everyone on the network,” he continues. “We are getting pretty close to it from a PB point of view, and other clients will follow because they understand it is taking up too much time. If you can opt-in beforehand, it really will help accelerate the process – we have delivered this very quickly to market, but clients are working through their approvals processes – and we think this is a very compelling proposition.”

What is often overlooked is how, in the post-trade or workflow world, the entire process depends upon its weakest link. For this reason, Mandelzis says Capitolis has taken a bottom-up approach to fast-track novations, rather than a top-down. “The faster tear-ups has been exceptionally well received, but will take a few months to get everybody onboard as some firms continue to build their internal processes to connect and leverage our technology. Once that is done, we will release additional workflows that broaden the benefit of fast-track processing – it’s going to take time – but we are confident we can get to a stage where 70% of the flow will be almost instantaneous in terms of its approval.”

The main benefit put forward by optimisation providers more generally is that by freeing up financial resources, market participants are able to trade more, at lower cost. For Mandelzis, providing that benefit even quicker will help banks in particular novate more trades and deepen the capital benefits. “This is going to make a big difference when thinking of the impending changes to the G-SIB rules and the likely changes from the Basel end-game, which could see us move to a daily average. It is going to be increasingly important – especially for the prime brokers.”

There has been much focus on quicker settlement times in financial markets, with FX included. To a degree, such a move requires a substantial critical mass to really deliver the benefits, something Mandelzis says Capitolis has been building over the past two years.

“Capitolis had already made tremendous progress in reducing risk in the market, allowing for more novations to be completed, increasing efficiency, and reducing gross notional for our participants,” he concludes. “We’ve also seen massive volume growth, almost 50%, on the platform in the past year and have added more FX prime brokers, executing banks, and major buy-side participants. We now look forward to taking our network to the next level by getting as close as possible to near real-time novation processing and completion.”