Derivatives House and Interest Rate Derivatives House: Citigroup

IFR Awards 2020
9 min read
Christopher Whittall

Stress test
The global pandemic ensured 2020 was a trading year like no other. For remaining a consistent and reliable trading partner for its clients during this extraordinary period, Citigroup is IFR’s Derivatives House and Interest Rate Derivatives House of the Year.

Derivatives House

Financial market crises provide the ultimate stress test of investment banks’ trading operations. Swooning markets expose creaking infrastructure; gung-ho traders suddenly find their riskiest bets deep in the red; and time spent putting out fires internally distracts from vital client business.

The coronavirus pandemic put banks through an unusually thorough examination, with huge volumes passing through financial markets at a time when many were forced to work from their kitchen tables. In this treacherous environment, Citigroup stood out among the top derivatives dealers as a constant and stable presence for clients across the globe – and across asset classes.

These “were some of the most volatile conditions that any of us have ever seen”, said Andy Morton, global co-head of markets and securities services. “Market share figures would show that we more than held our own in terms of meeting the clients’ needs.”

“The business model is about consistency,” he added. “In the heat of the battle, we were there.”

It was a far cry from the financial crisis of 2008, when astronomical losses at financial institutions such as Citigroup froze credit markets and tipped the economy into recession.

Instead, Citigroup was one of several major investment banks to head into this crisis with a clean bill of health and fully prepared for the unique challenges remote working presented.

That enabled the bank to continue its focus on servicing clients, while its significant investments in electronic trading tools helped it process huge volumes at the height of the turmoil.

It’s no coincidence, then, that Citigroup’s share of client business increased markedly in this tumultuous period across stalwart activities such as interest-rate and foreign-exchange derivatives, specialist areas including structured credit and more recent success stories such as its equity derivatives franchise.

“We’re built for moments like that,” said global co-head of markets and securities services Carey Lathrop.

“We wanted to have a very balanced business across our products, across our geographies, across our client types,” he said. “Having the heterogeneity of a franchise like that … also allowed us to stand out during the periods of peak volatility and illiquidity.”

Rates success

Interest-rate derivatives epitomised the bank’s success, with Citigroup recording huge volumes of trades in both the flow and structured parts of its business. That was against the backdrop of one of the most volatile rates markets on record, with Treasury yields whipsawing around. Meanwhile, more than 80% of Citigroup’s rates staff globally was working from home.

“What really made this year a unique one is just the speed with which this crisis impacted all facets of global markets – and also humanity,” said Deirdre Dunn, global co-head of rates. “We did an incredible job leveraging the global nature of the bank to learn and adapt faster than others.”

Citigroup’s extensive presence across the globe provided vital information to senior traders as the crisis started to unfold, allowing them to position books and get ahead of the curve. That put the bank on a solid footing when its vast institutional client base scrambled to reshuffle positions.

“The de-risking that we did early on in the crisis in February … made it easier for us to perform our role in the market, which is to intermediate risk,” said Pedro Goldbaum, global co-head of rates.

Rates was one of the areas where Citigroup’s investment in electronic trading paid dividends. Electronic pricing requests increased by 1,000% in March compared with the previous year. The bank said it attracted 37% of all client enquiries for US dollar interest-rate swaps on electronic platforms that month, alongside large market shares in electronic trading of euros, sterling and Canadian dollars.

“The benefit of technology is the scalability,” said Lathrop. “When you see the explosion in volume and activity it’s much easier to respond.”

Citigroup also prospered in structured rates, significantly increasing sales of structured notes to a record level for the bank in 2020 and providing a vital source of funding in the process. The bank made particular strides in the Formosa bond market where callable US dollar debt is sold to Taiwanese investors.

“Formosa bonds and structured notes in general are now a very large part of how we think about funding the company as well as a large part of the rates business,” said Bhaavit Agrawal, global head of medium-term notes and private placements, rates and currencies.

Currency strength

Foreign exchange was another crucial pillar in the bank’s success. Citigroup was active helping clients manage their FX exposures, whether it was airlines unwinding currency hedges to release cash or structuring deal-contingent trades for would-be mergers and acquisitions.

More generally, these highly electronified markets proved ideally suited to pandemic trading, allowing customers to transact with ease and confidence away from their offices. Citigroup registered a 271% increase in client mobile FX transactions on its Citi Velocity platform in 2020 from a year earlier.

“The investments we’ve made both in the past and ongoing in our electronic and digital offering were critical. These are moments where clients needed to transact rapidly,” said Itay Tuchman, global head of foreign exchange.

“We didn’t predict our tools would be tools for a pandemic and that these would be demanded in an instant, but they were and that was a real benefit to our clients and to our business.”

Equities momentum

Equity derivatives was another important growth area, with Citigroup recording its best first half of the year for this business in four years.

“You owe to the clients your commitment to serve them through time and through space – any market conditions, in good times and bad times,” said Fater Belbachir, global head of equities.

Citigroup continued to build on its prowess in structured equity derivatives, increasing its structured note issuance by 78% in the first three quarters of the year to US$32bn. That came as the bank also sidestepped some of the heavy losses European rivals suffered when markets nose-dived in March.

Elsewhere, Citigroup displayed its flair for helping institutional clients solve thorny problems too. That included developing a hedging programme that allowed Italian insurer Generali to make a significant reduction in the amount of capital it must put aside against some of its unit-linked funds, while also decreasing the volatility of those exposures.

“The relationship with Citigroup has been very positive,” said Edoardo Malpaga, head of group capital management at Generali. “We knew that it was tailor-made for us and it was transparent in terms of fees.”

Citigroup also made inroads in US flow trading, increasing its market share with clients over the year.

“One of the key tenets of the business in derivatives is to try and make it as diversified as we can to not only increase revenues, but also lower volatility of these revenues,” said Quentin Andre, global head of equity derivative and delta one sales.

Credit power

In credit, Citigroup was well-prepared for the significant challenges facing trading desks in March when markets slumped, creating what Morton calls a “real life stress test”.

One of the areas to come under pressure was some of the complex structures that slice up pools of credit-default swaps, known as collateralised synthetic obligations. Citigroup’s traders anticipated the squeeze and were well-placed to help clients get out of loss-making positions.

“We went into the year risk-managing ourselves in a very disciplined way,” said Matt Zhang, global co-head of securitised products trading. That meant “we were able to be there and provide that liquidity that the clients needed so much”.

That included in CMBX – the derivatives index tracking commercial mortgage-backed securities, one of the worst-hit corners of credit markets. Citigroup said it retained a dominant market share that reached around 46% in March. It also increased its market share in other products such as standardised US index tranches.

“We are striving to be that credit powerhouse across the globe on every single product suite,” said Zhang.

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