OpenGamma, a fintech startup that helps finance firms manage risk and capital in the derivatives market, has raised $13.3 million (£10.4 million).
The London-based company has raised the sum from well-known technology venture capital fund Accel, dealer broker ICAP, which recently pivoted to focus on fintech investment, and Cristóbal Conde, the former CEO of financial software company SunGard. Conde already sits on the companies board.
OpenGamma makes cloud-based software to help finance firms calculate and manage their risk in the global derivatives market.
A derivative is an agreement between two parties to pay each other money depending on the performance of some other underlying asset, such as gold or shares in Apple. The total value of these contracts in the world is more than $600 trillion (£470.9 trillion), according to the Bank for International Settlements.
It was a largely OTC (over-the-counter) market, meaning each contract is agreed privately between two companies. But since the financial crisis, regulation has required central counterparties and clearinghouses act as a third party in trillions of dollars worth of derivatives transactions.
These third parties assume the risks and share the losses if one of its members defaults on one side of a derivative trade. An example of a central counterparty in the UK would be LCH Clearnet, which is run by the London Stock Exchange.
Finance firms have to post what’s called collateral for each trade — a certain amount of money to show they are good for it in case the trade goes against their favour. Calculating how much collateral needs to be put up and what the company’s total exposure to loss is at any one time can be a complicated business.
That’s where OpenGamma comes in.
CEO Peter Rippon says: “You have individual firms posting very large amounts of margin to those clearing houses, it can literally be billions of dollars. Our software helps them to optimise their decision making around reducing the amount they are posting to the clearing house.”
“The problems that we’re solving for firms have been ultimately created by OTC derivatives regulation in the first instance. It’s the regulation that’s creating the need that we are addressing.”
In this sense OpenGamma fits into the fintech subset of RegTech — regulation tech — which is a hot buzzword in the industry right now. Banks, finance firms, and fintechs themselves are all looking to startups to come up with a smart, cost-effective way to meet their increasing regulatory burdens.
Rippon says: “We implement the risk models — there’s a set of standard risk models used by clearing houses — we implement those models and then we are exposing those to clients via our managed SaaS [software as a solution] solutions so they can compare them.”
This SaaS solution, an industry term for cloud-based software that can be deployed quickly to solve a specific problem, is a key selling point.
Rippon says: “The main difference between ourselves and the legacy software providers is the way that we’re building and deploying our software. The fact that we’ve got an open source library at the heart and we’re using SaaS, cloud-based delivery mechanism means that we can deploy to our clients massively faster — a matter of weeks, whereas historically that would be a multi-year deployment of enterprise software.”
OpenGamma sells its software to both buy and sell-side clients, as well as the clearing houses themselves. Rippon named CME as one of its clients.
Founded in 2009, OpenGamma has raised just shy of $40 million. Accel and ICAP were already investors in the business. Rippon says the latest $16 million will be used to market OpenGamma’s solution to more clients.
“We’ve spent the last few years building out the key foundations of our offering — our open source library for example and our SaaS solutions for example,” he says. “The funding allows us to accelerate our go to market for deploying these solutions to markets.”
OpenGamma will also work on new products. Rippon says: “The first solution we’ve built is this margin service. We have follow-on solutions in the pipeline which are very much along the same theme, helping firms to deal with the impact of regulation. They’re all built on the underlying risk analytics capabilities we have but solve specific problems that either our buy-side or sell-side clients have as a result of regulation.”
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