Capitolis to acquire LMRKTS

Capitolis, a start-up that operates a peer-to-peer market that allows banks to optimize or offload capital-intensive exposures, has struck a deal to acquire foreign exchange-focused compression provider, LMRKTS. The deal, whose terms have not been disclosed, is set to close at the end of August.

The tie-up combines Capitolis’s bilateral optimization operations with LMRKTS’s multilateral focus to create “the most complete trade compression solutions” in the market, according to a statement.

Gil Mandelzis, founder and chief executive of Capitolis, said the acquisition would provide “opportunities to expand our product suite and enhance our technology.”

The agreement comes after a spate of corporate action among optimization providers as they battle for supremacy amid a changing regulatory environment, which is set to heighten demand for services aimed at unlocking efficiencies in capital and balance sheet usage.

In January, Quantile Technologies, one of the earliest rivals to incumbent TriOptima in interest rate swaps compression, secured a $51 million investment from US private equity firm, Spectrum Equity.

The same month, IHS Markit pumped $113 million into a new joint venture with CME focused on post-trade services, a business which will unite its trade processing services firm MarkitServ with the Chicago exchange group’s optimization offerings, including TriOptima.

In March, Capitolis completed a $90 million funding round, led by Andreessen Horowitz. The injection follows an $11 million strategic investment from Citi, JP Morgan and State Street, and takes total funding to $170 million since launch.

A fifth provider, Capitalab, is owned by BGC Partners. The firm has also teamed up with CLS to enhance FX portfolio compression.

Behind this wave of activity is an overhaul in the way banks calculate their leverage exposure. The standard approach to counterparty credit risk (SA-CCR), which became effective for European banks in June and will be compulsory for US banks in January 2022, replaces the blunt current exposure method (CEM) with a risk-sensitive framework for leverage ratio and risk-weighted assets (RWA) calculations.

This incoming regime favors well-hedged portfolios, while penalizing directional risk. For many banks this will switch the optimization focus from notional reduction—via traditional compression services—to rebalancing services, which shuffle exposures between counterparties.

This heightened focus on counterparty exposures may also to nudge asset class attention from notional-heavy interest rate derivatives to foreign exchange, where in-and-out buy-side trading can see counterparty exposures build rapidly. With SA-CCR enabling currency pair netting, the new regime offers more opportunities to reduce capital via compression across all tenors within a single pair.

Key Capitolis clients are backing the latest tie-up. In a statement, Itay Tuchman, global head of foreign exchange at Citi, said the firm offers “truly innovative solutions” to capital markets. “We support the firm’s ambitious vision for the future,” he added.

Capitolis’s FX novations platform, which serves more than 75 financial institutions, has eliminated more than $5 trillion notional since inception in 2017. This includes $959 billion of FX options novations during the first quarter of this year. In January, the firm signed a data deal with settlement provider CLS to bolster efficiency in its compression and novation services.

LMRKTS, which was formed in 2013 by Lucio Biase, Sandeep Karkera and Hilary Park, who is now chief executive of the firm, offers compression and optimization across a range of FX products. The firm says it has eliminated some $20 trillion in exposures for firms since its first compression run in 2015. It has previously received equity backing from the investment arm of the World Bank and private equity firms.

“Capitolis shares our vision for the future of capital markets, and we’re proud to be joining forces with them,” said Park in a statement.

While the acquisition aims to bolster Capitolis’s FX optimization capabilities, the start-up’s ambitions stretch further afield in addressing financial firms’ wider capital and balance sheet constraints.

A separate service aims to reduce dealer hedging costs via a structure which offers short-term paper to buy-side firms. These funds are used to offer directed hedges to dealers on their over-the-counter derivatives.