OpenGamma has raised $10m (€8.9m) in venture capital funding as the next phase of the uncleared margin regulation is due to go live in September this year and boost the derivatives risk analytics provider’s client base.

The firm said in a statement this week that it has completed a funding round led by Dawn Capital, an early-stage fintech and software venture capital firm. A funding round in 2016 was led by venture capital firm Accel and Icap, with additional investment from Cristóbal Conde, the former president and chief executive of SunGard.

All go @dawncapital! Welcome derivatives analytics leader @OpenGamma to our B2B family. Great to lead $10M round partnering with this fantastic team, @Accel and @CMEVentures building the next European #fintech winner #SaaS #Upwards https://t.co/vXVVPuKEQT via @TechCrunch

— Dawn (@dawncapital) April 3, 2019

Maxime Jeanniard, chief operating officer at OpenGamma, told Markets Media: “We will use the funds to invest in our growth drivers. Expanding the team in the US is our number one focus and we are at an early stage in Asia. We will also launch two new products over  the next 12 to 18 months.”

OpenGamma launched a US office last year, which now has six people, and will grow it’s Singapore office over the next year. The funding follows a period of growth with a 300%  increase in recurring revenue in the last 12 months, and doubling of the customer base and team.

“Revenue growth has been driven by new client acquisitions,” added Jeanniard. “We have doubled our client base which now  includes the biggest banks, asset managers and hedge funds.”

The new funding will allow OpenGamma to launch new products related to collateral management and treasury.

“Clients have been asking for a collateral optimisation product in order to reduce their capital requirements,” said Jeanniard. “It is an adjacent problem to our margin offering and in the early stages of development.”

Josh Bell, general partner at Dawn Capital, said in a statement: “As regulation continues to drive up the cost of trading derivatives, efficient use of capital has become essential for financial institutions to maintain their business models. We are delighted to be partnering with Peter and his team as OpenGamma continues to expand its product proposition and geographic footprint.”

Regulation

This month market participants in the European Union will have to comply with MIFID II requirements for transaction costs reporting, for which OpenGamma provides analytics. Jeanniard said: “Firms need to provide transparency to investors.”

In September phase four of the uncleared margin regulation will come into force, with phase five in September next year. Regulators began implementing the mandate to exchange initial margin on uncleared derivatives in 2016 in annual phases. The implementation thresholds are based on firms’ notional amounts of outstanding contracts of the derivatives that fall under the regulation.

Consultancy Celent said in a report that the first four phases apply to approximately 100 firms globally. In comparison, the fifth phase will apply to more than 1,100 additional firms, involving 9,500 bilateral counterparty relationships, and 9,000 negotiated agreements.

The amount of additional margin posted per trade is predicted to hit $2 trillion by the end of 2020 – mainly as a result of uncleared margin rules. Click the link to find out more on our latest infographic >> https://t.co/DowExyjA6G pic.twitter.com/4DLlyNx0t8

— OpenGamma (@OpenGamma) February 14, 2019

Jeanniard said the next phase will boost the number of OpenGamma’s buy-side clients as few asset managers, and regional banks, have been covered by the rules so far.

Vikas Srivastava, chief revenue officer at FX technology firm Integral, said in an email: “While September may seem like a long time away, those asset managers pulled into the upcoming uncleared margin rules regime should get prepared as soon as possible. Those who put their technology spend to best use by unbundling their liquidity from credit, while also making operational efficiency gains, will undoubtedly be best placed to weather the initial margin storm in September.”

#UMR is forcing the global asset management industry to adjust to a whole new operating model. See what market players need to take into consideration to implement waves 4 and 5 – and stay the course https://t.co/iNP8hkRZes

— Euroclear (@EuroclearGroup) April 4, 2019

Euroclear said that during the first three phases only 34 global asset managers came under the scope of regulation. However the next two waves will cover 1,200 firms, who between them have 9,500 counterparty relationships, each of which requires new sets of documentation.

“Waves 1 to 3 showed that firms needed new documentation, new customer selection, fresh understanding of collateral eligibility risk and collateral optimisation,” added Euroclear. “The implementation of these waves also included a huge amount of tech and infrastructure changes for the IT and operational teams within firms.”

Peter Rippon, chief executive of OpenGamma, said in a statement that regulation has created new opportunities for firms like OpenGamma. “We work with key market infrastructure providers, including CME Group, Eurex, JSCC as well as top tier banks, to ensure we have access to the models needed to solve a key industry problem: the rising cost of trading derivatives,” he added.

OpenGamma research has found that derivatives trading costs could double as volatility increases.

Our latest stress testing research is featured in @traders_tweets this week. Click the link to read the article in full: “Derivative Trading Costs to Escalate Amid Market Volatility Fears” >> https://t.co/lOIwn6ganB pic.twitter.com/AncopzUoTJ

— OpenGamma (@OpenGamma) March 4, 2019

The study found that during times of market stress, requirements to post upfront cash can jump by half on average, with initial margin rising by as much as 94%.

High volatility could increase initial margin by up to 94% for some portfolios which calculate margin requirements using a standard portfolio analysis of risk (Span) methodology for futures and options.

Rippon said in a statement: “No fund manager wants to be posting more margin than they need to. Understanding how to control initial margin costs will be key for firms to maintain liquidity, as they may need sufficient cash to buffer against unpredictable market conditions.”

OpenGamma’s research also found that by hedging appropriately, the initial margin increase would fall to a much lower 14%.