Clearing bank of the year: Citi

Asia Risk Awards 2018

Many banks have pulled back from client clearing in recent years. That has caused client disruption, and only underscored the importance of having a clearing bank that is prepared to be in the market for the long haul.

Citi has consistently demonstrated a long-term commitment to its clearing business around the world, and as competitors exited the business, the US bank has jumped in and filled the gap for clients.

“With other clearing brokers withdrawing from the business, Citi have demonstrated strong commitment to the clearing world, and that is appreciated in the business that we do,” says a senior risk manager from an Asian bank.

“In some ways, they were less amenable to our legal documentation, insisting we had to make this change or that change, but we did eventually get there, and they have been proved correct in the long run.”

The comments assume significance when put in the context of an ever-diminishing pool of clearing banks as shrinking margins in the business force lenders to pull back. The exits have caused hardship for clients.

For instance, when Deutsche Bank shuttered its US swaps clearing business in February, a number of Asian clients engaged in dollar swaps trading in the US had to immediately find an alternative clearing broker that could offer such services. Some of them turned to Citi.

For Citi, one of the sweetest victories was when a large investor, which five years earlier had signed up with a rival, switched to the US bank – vindicating Citi’s efforts to provide broad market access and long-term commitment to clients.

Citi’s client clearing business has really come of age over the past 12 months, and winning significant mandates from established buy-side firms across the region has been a clear demonstration of this, says Ian Nissen, head of futures, clearing and collateral in Asia.

Not only can Citi offer such wide product and market reach, but it is also able to offer both exchange-traded and over-the-counter services within a single model, thereby helping to streamline client operations. Additional value has been created through the merging of the bank’s prime and derivatives business in 2017, creating a central prime, futures and securities services (PFSS) business.

The bank also got help from unexpected quarters. A move by India’s largest stock exchange to stop providing share trading data to overseas exchanges effectively shut down the market for Nifty market access products out of Singapore. That move increased demand for onshore access and, by deploying additional staff into the fastest-growing major economy, India was able to grant onshore access to more than 10 global clients in the last six months, helping the bank achieve a 60% increase in revenue compared to the year before.

“This is a fantastic example of how Citi’s global footprint and its presence in all these domestic markets comes together to deliver real value to clients,” says Nissen. “Being able to align our business under the PFSS banner has worked for us in India and across the globe in ways that we could only have hoped for prior to the merging of these businesses.”

Another key market in which Citi has been highly active this year is Japan, growing the notional volume for clients’ initial margin that it clears through the Japan Securities and Clearing Corporation by more than 60% year over year, despite being shackled by the fact the JSCC is not yet recognised by the US Commodity Futures Trading Commission as an equivalent derivatives clearing organisation (DCO).

Japan didn’t happen overnight. You have to demonstrate to your clients how you are the experts on risk management, how you are the experts on the regulatory front, and that you have the platform that can win business

Thomas Treadwell, Citi

“A number of hedge funds in Europe and around the world have been trying to gain access to the JSCC this year, and we have onboarded a number of these clients to our platform successfully,” says Thomas Treadwell, Citi’s head of OTC clearing for the Asia-Pacific region. “This is great because not only does it help them build out their platform, but it also brings another dynamic to the market by improving the JSCC basis.”

Over the past year, Citi has managed to bring into its fold nine top-tier global clients to its Japanese platform. Nearly three-quarters of all non-Japanese clients on the JSCC go through Citi.

While the lack of CFTC DCO status makes it harder for US clients to clear via the JSCC, Citi has enjoyed global success with its yen clearing business in Japan, particularly for longer-dated swaps, which tend to favour the JSCC, rather than other clearing houses, such as LCH. If the JSCC were to obtain DCO equivalence, Citi could attract even more counterparties, says Treadwell.

“Japan didn’t happen overnight. You have to demonstrate to your clients how you are the experts on risk management, how you are the experts on the regulatory front, and that you have the platform that can win business,” he tells Risk.net.

Looking to the future, Citi is also keen to identify those markets that are on the cusp of opening up and position itself accordingly. China is the big story this year, and Citi has been ramping up its team in Hong Kong over the past 12 months in order to leverage the hub here for inbound and outbound access.

“We were by no means the first mover, but I think the advantage we’ve got is that a lot of the firms that went early in China now seem to be suffering from fatigue,” says Nissen.

“So whilst we were not the first, our timing is perfect because China has started opening up the futures market to foreign investors, and we are moving very quickly to build our capability with some of our partners offshore.”