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Capitolis, the capital markets technology provider, has acquired BGC Group's rates portfolio compression and margin optimisation business, Capitalab, for $46 million, against a backdrop of rapidly evolving derivatives market infrastructure and regulatory demands.
In a detailed message to stakeholders published on their website today, Capitalab's principals outlined the critical role of derivatives in today's financial markets, highlighting that companies need these instruments more than ever for risk hedging. The scale of this demand is reflected in Bank for International Settlements data showing the total gross notional value of outstanding over-the-counter (OTC) derivatives contracts reached US$607 trillion in 2020, with an additional US$73 trillion in exchange-traded contracts.
The principals emphasised how regulatory changes, including the European Market Infrastructure Regulation and similar rules from the US Commodity Futures Trading Commission, have fundamentally altered both listed and OTC derivatives markets. While these changes have strengthened the global financial system, they have also introduced new complexities and increased costs for derivatives users, particularly in terms of capital requirements. Users continue to face challenges from mismatches between their derivatives positions and the risks they aim to hedge.
It was against this backdrop that Capitalab was established in 2015, launching its flagship Swaptioniser® compression service for swaptions. The company has since expanded its product range to address the growing cost and complexity challenges in derivatives usage, while working to improve their effectiveness. To date, the firm has compressed more than $10 trillion in gross notional options contracts.
"Portfolio compression and margin optimisation are extremely important to the capital markets and, when properly executed, truly helps the financial system and its participants," said Gil Mandelzis, CEO and Founder of Capitolis. "Capitalab's highly innovative technology complements our existing suite of award-winning solutions and together we will create a 'one-stop shop' for compression."
The acquisition, representing a revenue multiple of approximately 7.5 times, will see Capitalab's founder and CEO, Gavin Jackson, join the Capitolis executive team.
BGC Group will retain its post-trade foreign exchange risk reduction business, previously part of the Capitalab brand, rebranding it as Fenics NDF Match to align with its technology-driven Fenics division, which generated over $550 million in revenue in the past 12 months.
Sean Windeatt, Chief Operating Officer and Global Co-Head of Brokerage of BGC Group, said: "We are proud of the business we have built at BGC and believe Capitolis will be an excellent home for Capitalab, as it enters its next phase of growth. The sale of Capitalab is yet another example of BGC unlocking value for its shareholders."
The acquisition follows recent investments in Capitolis by major financial institutions including Citi, Morgan Stanley, State Street and UBS, and builds on the company's 2021 acquisition of LMRKTS. The company, founded in 2017, was recently named World's Best FX Software Provider at the 2024 Euromoney Foreign Exchange Awards.
BGC noted that while the one-time gain from the transaction will be included in its consolidated results under U.S. Generally Accepted Accounting Principles (GAAP), it will be excluded from the company's Adjusted Earnings.
Capitolis is backed by venture capital firms including Canapi Ventures, 9Yards Capital, SVB Capital, Andreessen Horowitz, Index Ventures, Sequoia Capital, Spark Capital, and S Capital, alongside strategic investments from global banks including Citi, J.P. Morgan, Morgan Stanley, Standard Chartered, State Street and UBS.
Capitalab's principals also noted that their team includes experts in trading, quantitative analysis and technology, positioned to offer creative, tailored solutions to client problems. They emphasised that the acquisition by Capitolis would provide their network with expanded optimisation and compression solutions, allowing opportunities to manage counterparty exposures across various rates, FX, and credit workflows. They reaffirmed their commitment to partnering with the derivatives industry to promote sustainable growth and resiliency in what they described as an "ever-changing and ever-exciting marketplace."
