04 May 2012, Richard Jory, Structured Products
This was the year that Citi finally broadened its distribution model to account for the loss of primacy with once captive distributor Morgan Stanley-Smith Barney, capitalised on the merger with Citi Private Bank, supercharged its market-linked certificates of deposit (CDs) and delved deeper into Latin America.
“Citi is a wonderful partner,” says Randal Pegg, executive vice-president at Advisors Asset Management (AAM) in Colorado. “We met them when they started going through the rebuilding of their distribution channel and they have been to several of our offices to help educate our reps.
“They are in the middle of a transition but they work with us pretty well on reverse enquiries, as well as the monthly calendar offerings,” says Pegg. “They are getting the right people in place and I think they are moving in the right direction.”
The bank’s concerted effort to rebuild is in contrast to some of its competitors, which have consolidated or even reduced numbers and resources. “We have gone in the opposite direction to many of our competitors with this buildout and have invested in the business, including the creation of an in-house technology group,” says Barbara Mullaney, managing director and head of Americas retail structured products at Citi in New York. The technology group “comprises front-office people that we took out of the business to focus on how we could deliver product efficiently and link the client part of the business with technology. This has worked really well and it allows us to provide education through websites.”
Mullaney notes that US regulators have been approving of the bank’s branding under its CitiFirst moniker, as well as its marketing and educational material. “Citi’s marketing is very good and they have beautiful brochures. They also do a good job in terms of after-sales support for their structured products,” says Glenn Lotenberg, managing director at Incapital in Boca Raton.
Citi has also invested heavily in Citi Investment Strategies (CIS), a team dedicated to expanding its proprietary trading strategies, around which it often builds indexes. The CIS team operates across asset classes. “We have also invested in product marketers – people who know how to market, place and make these strategies understandable,” says Mullaney. “The last thing we did was hire people for our secondary trading, medium-term note desk to fully support after-sales.”
“Citi’s challenge is that it was designed to sell internally and now it has to come out to the third-party space and sell structured products,” says Lotenberg. “Their vision is to do this direct and have a relationship with the customer and they are learning that they have to produce more attractive levels of yield now they are not selling to a captive audience. They have done a good job.”
Mullaney says the investment is paying off as customers return. “We still see people focusing on principal-protected products and CD platforms in the US market. We have also seen demand in the high-net-worth space for non-directional plays. With interest rates where they are, there is a lot of money sitting on the sidelines that people want to put to work, mitigating credit risk at the same time.”
As with any ruptured market, changes have been seen in investor requirements that extend beyond the obvious desire for the safety of CDs. Equities are still dominant, but there is lots of interest in fixed-income and commodity products, as well as ways to gain access to commodity markets and emerging markets that are beyond the reach of traditional retail, all of which can be found on Citi's platform, says Mullaney.
The bank is particularly appreciated for providing a strong service in commodities, foreign exchange, equity, fixed income and hybrids. “Citi is able to provide pricing across multiple asset classes, longer tenors, less liquid underlyings and exotic payouts,” says Matt Ginsburg, head of customised investment solutions at Wells Fargo Bank in San Francisco. “One of its strengths is that it is great at providing multiple pricing iterations and innovative structuring. For example, if we request pricing for a specific structure, Citi often assists with restructuring the underlying or payout to help optimise the terms based on broad themes we've provided.”
Citi’s relationship with Wells Fargo and other distributors has deepened as limits on insurance cover for CDs are breached. “We used to be an in-house group and our main customers were Smith Barney, our consumer bank and, to a lesser extent, our private bank,” says Mullaney. “We have now tapped into a much broader market and have strategic partnerships with a number of third-party distributors, including Wells Fargo and UBS. We are looking at ultra-high-net-worth all the way down to broad retail, which would be our consumer bank, and we have more than 90 third-party counterparties on our platform, for which the approval process is rigorous.”
“Due to Federal Deposit Insurance Corporation limits, we have been partnering with Wells Fargo, which has opened its platform to us. We have also worked with HSBC and Union Bank and we are leveraging some of the other regional banks,” says Mullaney.
Citi has had most success with its Dual Indexed Range Accrual notes, which are available as notes and deposits. An above-average interest rate is on offer if two conditions are met: the value of the S&P 500 or Russell 2000 must remain above 70–75% of where the index closed on the pricing date, and the yield on three- or six-month US dollar Libor must stay within a certain range.
In one example, there is a guaranteed 6.5% coupon in year one, and 5.5% for each day of years two to 15 on which the two criteria are satisfied. The bank has sold $313 million of notional from these products. “We distribute a number of their offerings, mainly CDs, of which Citi’s do well for us,” says AAM’s Pegg.
Although it dabbles in the public market and registers a steady stream of structured products with the US Securities and Exchange Commission, the majority of the bank’s distribution arrangements are by bilateral agreement. “We are not out there every month with 20 reverse convertibles and hoping that they will fly across the different distribution channels. We are much more targeted and work with our clients driving the ideas that we put out there.
“We have been creating reverse convertibles for the past eight years, but with a more portfolio approach. We encourage our clients to take a more laddered income approach, avoiding the ‘Chinese menu’ approach,” says Nicholas Parcharidis, managing director and head of Americas sales at Citi Private Investor Products.
The bank has also broken new ground in the broker-dealer world, setting up a registered 40 Act fund vehicle, which enables it to sell products as mutual funds, the first of which is the Citi Market Pilot.
Citi has also capitalised on the link-up with its private bank. “Though we have been trying to get through to the private banking channel for a long time we have struggled in this market," says Mullaney. “But, as of the third quarter of 2011, we entered a global joint venture with our private bank that consolidated all markets activity regionally, with Nick Parcharidis heading North and South Americas.”
It is within the private bank that Parcharidis has seen most demand for the market-neutral strategies it has been busy creating, particularly during the past year, he says.
The CIS team in London is responsible for creating these strategies for all parts of the US bank, most notably Cubes, a commodities strategy that led to the creation of an index that allows the bank to pick the best point on the curve to roll. “The trade we have been most successful with is going long the Cubes index and short the Dow Jones-UBS Commodities Index,” says Mullaney. “It is not a directional play on commodities, but you are picking up the differential between the two indexes based on the smart roll feature we have in ours.”
Cubes has been well received. “It has allowed our high-net-worth clients in the private bank in the US and Latin America to add a low correlated asset to an existing portfolio, in essence to obtain slightly better returns with less risk," says Parcharidis, adding that the strategy has attracted $1.5 billion of assets under management in the Americas over the past year.
“The difference with our [strategy] is that we don’t pick a separate point on the curve,” says Mullaney. “Ours looks back over the past two months then looks at what the forward curve is telling you before picking the optimal future to roll. Unlike the other strategies out there, ours is not predefined.”
Parcharidis continues: “As we transitioned our business and broadened our client segments the ultra-high-net-worth segment – particularly in the US but also in Latin America – has been important and blends into family offices. Many of these non-directional strategies are the ones that have resonated most with these clients.”
Going local in LatAm
"Latin America has been a strong focus for the past two years, during which there has been a trend for the repatriation of assets in the local markets, especially Brazil and Mexico,” says Parcharidis.
Together with the Citi Private Investor Products Group in New York, Citi Brasil established a local platform for structured funds in Brazil in 2009. “In the past two-and-a-half years, we have jointly established a leadership position in the sale of structured funds in the local market,” says Eduardo Forestieri, product head, wealth management at Citi Brasil in São Paolo. In 2011, we had a 25% market share, an increase of 9% compared to 2010. We sold seven funds that raised more than 600 million reais in 2011 alone. Last year was the first year in which Citi surpassed Santander, Credit Suisse and Banco do Brasil in structured products sales.”
A local fund platform is a prerequisite for doing business in Brazil. “Last June, we closed a US dollar-equivalent 18-month protected fund in local currency tied to American Express and Apple, which offered upside and a certain coupon above a barrier,” says Parcharidis.
The product raised 146.2 million reais (US$91 million at the time of the launch) and marked the first time that a Brazilian bank had issued a structured fund linked to two non-Brazilian underlyings, according to Forestieri. “It gave Brazilian investors access to US stocks without having to buy them on the New York Stock Exchange. Repeating the success of 2011, we just sold another structured fund linked to a basket of four consumer retail stocks (Macy’s, Abercrombie & Fitch, Nike and General Electric, which raised more than 140 million reais. “For the most part, we provide our investor clients with access to capital-protected short-term investments linked to local equities,” he adds.
Through its local issuance platform in Mexico, Citi allowed investors to keep their investments in local currency when issuing structured notes in Mexico that were denominated in pesos. “The notes were tied primarily to rates, though last year we extended this to multi-asset as well as equity underlyings,” says Parcharidis, who notes that around 35% of the bank’s overall business in the Americas last year was from Latin America.