Equity Derivatives House: Citigroup

IFR Awards 2019
5 min read
Christopher Whittall

Bucking the trend:

A combination of declining client volumes and a market slump in late 2018 have weighed on banks’ equity derivatives desks over the past 12 months. For growing its business in this challenging environment and solidifying its position as one of the top dealers, Citigroup is IFR’s Equity Derivatives House of the Year.

Equity derivatives revenues at nearly every major bank have declined over this awards period compared to the previous year. Structured product sales have been lacklustre, adding to the pain for that business following losses when stock markets dropped last December. Institutional clients, meanwhile, haven’t traded as much amid low volatility.

That has made Citigroup’s performance in equity derivatives even more impressive. The bank has recorded high-single digit growth this year in a shrinking pool of industry revenues as Citi continues to reap the rewards from a strategic overhaul of the business it began in 2016. Since then, Citi has grown its market share by 75% despite industry revenues flatlining.

“We’ve managed to develop our business across regions and product sets: particularly around the [quantitative investment strategies] and hybrids platforms, retail structured products and light exotics that have been quicker to come to fruition,” said Quentin Andre, global head of equity derivative distribution and equity structuring.

“This is one of the first years when we started to see the progress flashing green in most of these different buckets. That gives you a portfolio effect where you end up with a more stable, higher-returning franchise, which we’re starting to feel this year.”

While Andre and his colleagues wanted a broad expansion across all equity derivatives products when they started the revamp three years ago, they decided to focus first on where they thought they could make the deepest inroads quickly: the structured side of the business.

That proved to be a good decision given structured revenues have increased across the industry over the past three years, while equity derivatives flow-trading revenues have declined. Citi has recorded strong double-digit annual revenue growth this year in the more structured side of the business outside flow trading despite the wider industry wallet shrinking, even as it has recorded a small decline in its flow franchise in line with peers.

Part of Citi’s growth this year has been down to corporate equity derivatives, an area where the bank has traditionally fared well. But a sizable chunk has been the result of investing heavily across various product lines in its structured institutional client business – an area where Citi had previously punched below its weight.

Citi has traded a record amount of dispersion this year across a variety of strategies, an important theme given the sector rotation in the stock market, outpacing what it traded during the whole of 2018 by the end of July.

It has invested in its platform for delivering quantitative investment strategies, combining global product development with local origination teams to grow the business considerably.

Another key area of expansion has been in hybrid products, as investors have looked for ways to generate yield. Central to that effort has been managing all its cross-asset correlations in one desk, effectively creating a large diversified portfolio of macro risks to improve pricing across a range of products.

“Citi is always very good at knowing what we’re interested in and is more proactive in bringing those [ideas] to our attention … rather than just spamming us,” said one pension fund manager. “They listen to what we’re asking. Other [banks] are more transactional.”

Building on its success in the institutional business, Citi has made significant progress in its retail redistribution platform. In North America, the bank says it is now ranked number five as a SEC-registered structured notes issuer, having sat outside the top 10 a few years ago. It has made strides in Europe too, including reaching a partnership agreement with a large European private bank to create an electronic distribution platform scheduled to launch early next year.

That expansion has come alongside a keen focus on risk management. As well as recycling exposures from its structured product book with institutional clients, it has diversified its risk through bespoke indices in structured products. That has come as other banks with large autocallable back-books have suffered heavy losses during market sell-offs over the past year.

Citi’s investment in its equity derivatives platform looks set to continue, including a reinvigoration of its flow trading operations. The overall message is clear: the fixed-income trading juggernaut that is Citi is now showing real staying power in the fiercely competitive world of equity derivatives.

“We have a firm and strong and abiding commitment to the equities business and to the equity derivatives business in particular,” said Andy Morton, co-global head of markets and securities services.

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