Can you tell us a bit more about the firm, Lago Kapital?
Lago Kapital is a Finnish securities finance broker focusing on the European markets with a Russian twist. Tier II fund and investment companies comprise the majority of our client base. The other founding partner, Jani Koskell, and I, both having a long history of the securities finance markets in the Nordics, started playing around with the idea of setting up our business in 2011. We applied for the Financial Services Authority licence in 2012 and received approval in early 2013. Despite 2014 being the first full year of operation, we have already reached a break-even result in the beginning of this year.
How did you come up with the idea of starting your own company?
While both Jani and I were working at some of the major banks in the Nordics, it became evident that the few firms dominating the market were focusing only on Tier I clients, giving no attention to the Tier II clients. There was a clear market opportunity for a firm offering flexible and tailored services for the smaller firms that were becoming more and more interested in the equity finance field. We tested the idea with a couple of industry professionals and the feedback was very encouraging.
What services do you offer to your clients?
We started with basic securities lending products and have recently seen an increasing demand for financing transactions. We have a clear focus on specials instead of low-margin flow business, and we are focusing on non-traditional markets such as Russia and Turkey, where we are already trading actively. Furthermore, we are investigating the possibility of launching a single stock futures offering to provide more flexibility in terms of product structures to our clients. The more challenging the name and the market, the more you can rely on us delivering.
As a rather small player, your risk management processes must be robust?
Yes, we have made extensive efforts to minimise our counterparties’ exposures to all relevant risks. For instance, all collateral is handled off-balance. Moreover, we only accept cash collateral, which is kept in a segregated client account. We acknowledge that, being a small player, we need to put extraordinary efforts in risk management to be credible in the marketplace. Managing risks, both ours and our clients’, is at the core of our business.
What makes you stand out from the crowd?
As mentioned above, we are smaller than the major players in the market, which gives us the possibility to focus solely on equity finance products. So we can provide our clients with flexible and tailored services, run the extra mile to satisfy our clients’ needs. In addition, our pool of lenders consists mainly of investment firms with stable, long-term positions, which means fewer recalls.
Moreover, we have a clear focus on specials with a proven track record: for instance, we were one of the major providers of supply in Talvivaara and Outokumpu in 2013. Finally, we aim to include more non-traditional markets in our palette, for instance Poland and the major markets of the Middle East.
Could you elaborate on your plans in Russia?
We see Russia as a highly interesting market that offers considerable potential in securities lending. The Russian equities market is maturing, with the adoption of a T+2 settlement cycle and recent exchange mergers. Equity repos are still dominating the market, but we see a clear tendency towards securities lending.
Traditionally, Russian investors have focused only on Russian equities, but interest towards global equities has been increasing recently. Also, Finland has typically had close relations to and a lot of competence in Russian markets. We already have access to a nice inventory of Russian equities as there are plenty of Finland-based funds investing in Russia. Actually, after having a lot of dialogue with different players in Russia, we’ve been surprised how knowledgeable the people are and how modern the infrastructure is.
To strengthen our presence in Russia, we have recently hired a sales manager with a wide local contact network, who spends most of her time in Russia.
What about the risks of operating in Russia?
We execute prudent risk management in Russia, like in all other markets. In Russia, the fact that all loans are settled delivery versus payment reduces the risk as such. The same applies for equity repos, in case that is the transaction of choice. Further, we have ordered a legal opinion from the Russian subsidiary of one of the leading Finnish law firms, which concludes that our way of operating is in accordance with all rules and regulations.
Finally, we conduct background checks for all counterparties, leveraging on our contact network. We feel that given our pragmatic approach and long-term planning for establishing our presence in Russia, the risks are effectively mitigated.
Finally, where does the name ‘Lago Kapital’ come from?
Well, Finland is the country of thousand lakes, hence Lago (‘lake’ in Italian). Originally, ‘Kapital’ was supposed to be spelled with a ‘C’, but since we learned that there was already a company with that name in the US, we decided to adopt the Swedish spelling of ‘capital’ with a ‘K’ (Swedish is Jani’s mother tongue and the second official language in Finland). Therefore, even our name reflects the international focus of our firm. SLT
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