Capitolis Raises, Continues to Build, as FX IM Takes Spotlight

Capitolis has announced the successful completion of a $220 million financing round, valuing the business at $1.9 billion, it has also continued to add to its roster with another senior hire, as the firm sees significant growth across its business, driven by a blend of network and product growth and new innovations.

The funding was a mix of $120 million equity funding and debt, and led by Citi, with participation from new strategic investors Bank of America, Nomura, and Tradeweb Markets, as well as existing investors Barclays, BNP Paribas, J.P. Morgan, State Street, and UBS.

The latest addition to the ranks is Jon Gizzie, who joins as head of financial resource management. Reporting to Okan Pekin, president of Capitolis, Gizzie will be responsible for advancing Capitolis’ offering, partnering with banks and institutional investors to build solutions that help address their most pressing financing, capital and liquidity needs.

He most recently served as the global head of financial resources management for Citi’s client organisation, and joins Murugan Manickham (CTO), Ashwath Bhat (CFO), Mary Messer (global head of sales) and Roy Saadon (head of market development for portfolio optimisation), who have all joined the firm this year.

Gizzie joins as Capitolis has enjoyed a surge in business over the past quarter, thanks to significant growth in its FX business, as well as in Rates and Credit.

Gavin Jackson is co-head of portfolio optimisation at Capitolis, and while he points to increased activity generally in FX markets as providing a tailwind for the optimisation business, he also argues that product and service innovation has played a major role. “We now run multi-metric optimisations targeting different capital, liquidity and IM funding metrics across FX,” he explains. “This is a complex process across different regimes, such as the Liquidity Coverage Ratio, and has enabled us to offer participants much deeper savings.

“We have also more recently seen significant growth in FX Initial margin (IM), it’s probably been our fastest growing area of the business,” he continues. “Our whole FX network is most of the banks, with many already using our IM service.”

As evidence of the pace of growth, Jackson says that over the last three months, Capitolis has more than doubled, indeed nearly tripled, its run rate in terms of savings in the FX IM space for those banks. “Market participants generally are more aware of the impact of IM than they were maybe two or three years ago,” he observes. “It’s a big growth area for Capitolis and an area of growing importance for our FX clients.”

Jackson also points out that Capitolis is innovating heavily in improving its existing service, one such being improving the algos that underpin the service. “Traditionally when we have optimised it has been from a spot perspective – the current risk – and then we optimised that using overlay instruments,” he explains. “We looked less at the maturity of the risk and match the spot risk in the book. That results in a more-choppy profile in terms of mis-matches further down the curve – it does a great job at the spot end, but after a few days the value will deteriorate as the risk rolls off.

“So a big enhancement we have delivered to meet this is to look at that profile, how it rolls off, and not only optimise the spot profile, but also the forward,” he adds. “This makes the savings much longer lasting – and it has been a big driver in our IM savings recently, which can be 2-3X.”

The focus for this service is, naturally, at the short end of the curve, typically three days to two weeks, but as Jackson points out, without doing that forward profile optimisation, after a few days the savings would really diminish, “We now offer much longer lasting and stable risk and capital reduction benefits and that has helped us capture market share.”

This means, as the new management team and structure beds in under CEO and founder Gil Mandelzis, there remains plenty on the firm’s horizon. With penetration into the banking world firmly advanced, attention is inevitably turning to increasing buy side participation, which, given the growth in risk taken on by this segment, is likely to prove fertile ground. “We are looking to grow our buy side participation,” confirms Jackson. “We lead in the FX capital optimisation arena for prime brokers facing hedge funds – we have many hedge funds optimising on a monthly basis, which helps their PBs. It’s very light touch so the hedge funds don’t have to commit too many resources.

“This sits nicely with our D2C, buy-side-specific services in futures porting and FX options novations,” he continues. “In addition to the services we’re already providing those hedge funds, we have a different set called the Transfer Suite. This doesn’t optimise their IM directly, but does it indirectly, by providing what could be termed ‘a middle office helper’. The funds’ middle office teams optimise their IM in-house by moving between PBs and FCMs, so our futures porting service helps them with that. Additionally, our FX options novations service does that between PBs and EBs to get Pin risk off the books and get notionals down. Both of these areas are showing significant growth and we’re optimistic that this will continue.”

Jackson is also keen to stress that innovation will also continue to play its role. “We want to look at how we can help participants around market risk, for example,” he says. “The focus on capital efficiency extends into many different aspects of the markets business so we will continue to do our in-depth research to see where we can help further through innovative product design.”