The last 12 months have been momentous for Citi's Asia-Pacific derivatives clearing platform. Over-the-counter clearing revenue from the region has increased by over 50% while the bank has continued to gain market share in key clearing markets.
Citi holds the largest market as measured by notional volumes on Japan Securities Clearing Corporation's client clearing platform and is one of two international clearers on the JSCC. Citi's clearing platform now provides access to more than 50 exchanges and has connectivity to nine OTC clearing houses and 11 swap execution facilities.
While competitors have continued to retrench from clearing and have outsourced a range of services to third-party operators, Citi's derivatives clearing business has continued to add clients and provide access to key liquidity pools during periods of extreme market movements. One such example was in late June, during the period of Brexit-related volatility. During this period, the bank was in constant communication with exchanges and clients on margin requirements, says Thomas Treadwell, Citi's Asia-Pacific head of OTC derivatives clearing.
"Intraday liquidity is at the core of our service and this becomes a large task when you experience the type of volatility we saw during Brexit. We ran a lot of stress numbers and were on top of market moves that day to gauge how much we should call from clients and how much the exchange would call," he says.
With the leverage ratio and capital costs impacting how banks clear OTC derivatives on behalf of clients, the focus on capital has become more apparent. Most notably, capital analysis now sits at the front of the pricing discussion with clients, Treadwell says.
"Before winning a mandate, Citi will always take a look at a client's portfolio to understand its capital footprint and returns on key metrics including returns on capital and assets. These metrics are factored into how a client will be priced. Citi believes that transparency is key when building a relationship with a client. We spend significant time and effort working with our clients to help them understand how their portfolio performs and how to optimise this performance under the clearing paradigm. This feedback and approach has been very well received," he says.
A client's capital footprint on balance sheet is greatly impacted by netting certainty and the bank's legal efforts over the past two years have resulted in it gaining netting certainty for almost all Asian jurisdictions, says Treadwell.
"We have devoted a lot of legal resources to gaining netting opinions and now we have certainty for most meaningful jurisdictions in Asia. This is a critical input in the capital analysis during pricing, and we price to meet return hurdles," he says.
Citi has also won a number of significant regional mandates during the last 12 months, including a regional bank that was successfully onboarded within a five-week period, with legal documentation completed within one week.
"Citi completed a full onboarding from scratch-to-live trading in a five-week period, and I believe this is a very impressive turnaround. This story will continue as our client base becomes more diverse, expanding to buy-side clients who are not yet covered by a mandate but are now starting to increase their focus on clearing," says Treadwell.
Citi's level of service and expertise in OTC derivatives clearing has also been appreciated by its clients. An OTC clearing head at a Japanese bank says Citi's level of service was the key differentiator as pricing was comparable amongst various clearing providers.
"Competitiveness should not just be judged in fees but the overall level of service. Their clearing model which allows us to clear on a multi-entity basis is also something that we value," he says.
This view was echoed by the head of OTC clearing at an Australian bank.
"Their pricing is competitive with other clearers but what sets them apart is their service model. Their Asia-Pacific model suits us because our primary interest rate swap desk is in Singapore. Our relationship with Citi dates back over five years and we are very happy with their service as they often send specialists to keep us updated on latest clearing developments," he says.
Peter Jaeger, Citi's Asia-Pacific head of futures, clearing and collateral, says: "To win the Asia Risk Clearing Bank of the Year award for the fifth year in a row is a great honour, and we're grateful to our clients for partnering with us as our long-term strategy comes to fruition."