Foreign Exchange Derivatives House: Citigroup

IFR Awards 2021
5 min read
Christopher Whittall

Plugging in
Calmer markets provided a reality check for foreign exchange traders in 2021 after the high-volume, high-volatility environment of 2020. For growing its presence in these markets, Citigroup is IFR’s Foreign Exchange Derivatives House of the Year.

Citigroup has long had a towering presence in foreign exchange trading. Translating that into a commanding position in FX derivatives has nonetheless required significant investment given the complexities of these markets and the technological prowess needed to compete in this increasingly electronic space.

Citigroup’s efforts bore fruit in 2021 despite a market backdrop that offered precious little help. Major currencies traded in a narrow range, volatility was subdued and volumes were depressed compared to the bumper activity of 2020.

The US bank reaped the rewards of an e-trading revamp, recording a 35% annual increase in electronic FX options volumes as well as consecutive month-on-month growth from May onwards, culminating in a record month in November. Citigroup did this while also leveraging its dominant presence in emerging market currencies and continuing to craft structures designed to meet the needs of its corporate and institutional client base.

Robert Finn, global head of FX options trading, said Citigroup’s strategy of growing parts of its FX business that it had not traditionally focused on helped the bank navigate a more challenging market backdrop.

That “allowed us to build upon the huge footprint that Citi has in emerging markets in particular, by growing the emerging market options business and increasing a focus on episodic [transactions] and making that a bigger part of our overall risk portfolio”, Finn said.

“We’ve worked much closer with our colleagues on the banking side in bringing in large transactions and really using the best of Citi – its size, its scale and breadth – to be able to offer solutions to clients in a way that we may not have been able to do a couple of years ago.”

Bells and whistles

Citigroup’s jump in FX derivatives e-trading volumes came on the back of enhancements to pricing as well as various tech initiatives aimed at improving client experience. That helped secure more activity with banks, hedge funds and corporates, leading to a 29% annual increase in vanilla trades through the end of October and a 122% rise in exotics. Structured forward e-trading volumes were also up 17% following a revamp in that space.

“We invested a lot in our structured forwards offering on the platform,” said Javier Diaz, global head of eFX options platforms and distribution. “For this segment, the bells and whistles, the customisations are really key. It allows [private banks] to service their end clients. If we’re able to offer that through the electronic platform, it creates efficiencies for everyone.”

Clients say the bank has made strides across both electronic and voice broking in recent years. “Citi is very competitive, particularly in the vanilla space with very tight spreads for good sizes. They’re also very responsive when we have an enquiry or need help with a problem,” said a private bank FX trader. “The single bank platform is very well structured, and they’re also very responsive on our multidealer platform.”

Citigroup has also worked hard to expand its structured solutions business. The coronavirus pandemic meant corporate treasurers wanted greater flexibility to address uncertainties around when hedges should be executed or needed to be altered, delayed or even cancelled.

“The number one issue that clients faced was the forecast: they were not able to predict when the flows will happen and if they will happen,” said Michal Kowalczuk, head of EMEA FX structuring. “The number two issue was uncertainty of … when the settlement will actually take place.”

Citigroup worked with clients to offer forward contracts where the notional amount to be hedged could be adjusted, as well as trades that can be cancelled if the company’s hedging need disappears altogether. Lookback or averaging features could also be deployed to mitigate uncertainty over the best time to implement a hedge.

Meanwhile in the event-driven space, Citigroup was active in providing contingent hedges for clients looking to lock in an FX rate ahead of acquisitions closing during a record period for dealmaking in capital markets. Finn identified a greater cohesiveness across Citigroup as an important factor in the firm’s success.

“It’s been great when I look at the number of trades that we’ve done, the deals that have closed, the risk that we have accepted in the books,” he said. “We’re looking forward to Citi increasing market share in the years ahead.”

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