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Americas Derivatives House of the Year, FX Derivatives House of the Year and Derivatives Clearing Bank of the Year: Citi

By GlobalCapital
15 Jul 2020

As a result of the breadth and depth of its offering across asset classes, products and client types, while building market-leading technology solutions and delivering consistently high service levels, Citi is our Americas Derivative House of the Year, FX Derivatives House of the Year and Derivatives Clearing Bank of the Year.


Looking across Wall Street, it’s tempting to conclude that the days of the all-purpose generalists are over, with more banks retreating into core competencies and historic strengths. Not at Citi, the original financial supermarket. 

“Our strategy is the exact opposite of a niche bank strategy,” proclaims Itay Tuchman, global head of FX at Citi in London.

“When you parse through the different products from rates, to global spread products, to FX, to equities, what stands out most is our breadth,” adds Dan Keegan, North America head of markets and securities services. “There are very few instances in looking at our derivative footprint where across products we are not a top five or top three, and/or in certain products a top ranked derivatives house.

“Clients are looking for solutions that are cross‑asset in nature, so the more products you have strength in and the more things you can be to those clients, the more likely it is that you are going to get the call.”

Depth can be as important as breadth, and for Citi that means not just being top of the league tables for on-exchange flow businesses but also in more structured solutions. It’s where the firm has been making significant investment, says Keegan. “From hybrids, to quantitative investment strategies (QIS), to exotics, this is where investment dollars have been spent to build out the necessary infrastructure, risk framework and customization capabilities needed to service our client base.

“It’s not either or. To be a complete and comprehensive derivatives house, you’ve got to be able to provide services across both flow and structured solutions.”

DVSInvestment in technology has followed from the flow business into the structured side, says Tuchman, with the focus in the FX business on bespoke products with digital interfaces. For instance, it has delivered a module on its FX Velocity platform for non-linear products over the past two years, adding to the existing vanilla FX options business. “There are very obvious industry trends around digitalisation of even complex and structured products and that’s where we are proud of what we have achieved.

“We have taken existing best-in-class tech and just worked harder and harder to enhance and expand it so we can touch a greater proportion of what our clients want to consume from us.”

The firm has met demand from private bank clients, among others, that want a high degree of pay-off customization on structures such as accumulators or targeted accrual redemption notes, where it has delivered a front end service and large elements of the back end too, including pricing, term sheet generation, Excel compatibility and even “solver” functionality. 

With this tool, instead of deciding on which product they want and asking for a price, clients can specify the premium they are willing to give up and what they want to solve for. 

“It’s embedding what is essentially high-touch functionality in a digital low-touch offering,” says Tuchman. “Being able to do it digitally changes the work flow from having to spend time calling the salesforce, which the economics of the industry no longer support.”

Initiatives like these demand scale, the bank argues. “This is the space race of the FX industry and there are only so many banks that can leverage the kind of scale of that offering,” he says.

Digitalization alone, though, isn’t enough, and Citi continues to stand out for its service levels. “Clients need white glove service, even if the end product we are delivering is increasingly digital,” says Keegan. “What ultimately matters is staying close to the client to understand what the client wants, because one size doesn’t fit all.”

At Citi this is seen as increasingly important as the degree of customization through technology increases. By staying close to clients, the bank gains valuable insight into what clients really want. “We are humble enough to know what we don’t know, and staying very, very close to clients from the relationship and service perspective helps us design next year’s technology,” says Tuchman. “You have to know your client, be in front of your client and be having the conversation with your client about the evolution of these markets. We have learnt particularly over the last three or four years that that is a huge competitive advantage.”

Citi also thinks that the breadth and depth of its derivatives operation highlights the benefits of scale, underscored by the market volatility in March this year. Because it serves such a large and diverse customer base, its ability to internalize risk during periods of stress allows it to find liquidity for clients that might not otherwise be available on third-party electronic platforms.

“As we continue to focus on enhancing our internalization capabilities, we are able to enhance our liquidity offering,” says Keegan. “The events of March resulted in wider bid/offer spread, hence our ability to internalize flow and risk manage it appropriately led to tighter bid/offer opportunities for our clients with resultant share gain,” he says.

Clearing champion

Technology is also central to what has been a market-leading clearing business for many years.

“We are essentially an applied technology business,” says Jerome Kemp, global head of futures, clearing and FXPB. “We are therefore very focused on ensuring that we are in command and in control of our core operational technologies.” 

The benefits of having built its own systems to a specification that could meet its own capacity projections were evident during the extreme volatility earlier in 2020. 

“We were one of the few in the market to be able to say that we experienced no issues in our ability to process, even on the most extreme days of volatility we saw back in March,” says Kemp. “2019 was a year when we continued to develop and expand our technology, and we had it tested in anger at the beginning of 2020. We are very proud that we validated the work we have done.”

Last year also saw the firm bring its FX prime broking business under the clearing umbrella. 

“On one hand, it was to benefit from the systems, risk management and expertise that we have in the transactional space, and on the other hand to align it with the clearing business as we think that that’s the general direction of travel for FX underlyings,” he says.

Citi is preparing for a greater cross-section of underlyings to be mandated for clearing as the uncleared margin rules (UMR) capture more market participants and require them to post bilateral margin at levels much higher than they would be for centrally cleared products.

“More broadly, what our clients do and how they interact with Citi across multiple asset classes is going in the way of deeper integration,” says Kemp. “We look at client relationships across equities, commodities, fixed income and FX and seek to be relevant in every component of those various asset classes.”

An equity prime brokerage client, for example, can benefit from more efficient margining across equity PB activities and futures activity, he says.

Citi differentiates itself with its thought leadership, and while 2019 continued to see vibrant discussion of issues such as skin-in-the-game, Kemp thinks that, in 2020 and beyond, a number of issues engendered by the March volatility spike will come into the frame. The adequacy of initial margin as well issues relating to central counterparty (CCP) liquidity will likely emerge as key focal points, and Citi will be keen to add its insights to these discussions.

“Particularly in the futures market we saw CCPs very aggressively increase margin rates across a broad spectrum of futures contracts,” he says. “For me that would suggest that initial margin for these contracts is under-calibrated. I would expect to see regulators take a very keen focus on that particular question.”   

By GlobalCapital
15 Jul 2020