Citi’s global head of markets and securities services, Paco Ybarra, is a three-decade veteran of the US bank. He talks to Danielle Myles about running a truly global business, the bank’s equities strategy and the truth about the Volcker Rule.

Paco Ybarra

Paco Ybarra oversees what is very probably the world’s biggest sell-side markets operation. With trading floors in more than 80 countries and clearing and custody networks in over 60, Citi is one of the few truly global, full-service markets houses.

And it could not be in safer hands. Throughout his 30 years at Citi, Mr Ybarra has worked in the trading business in every region, spanning emerging and developed markets, and has seen the bank and industry at large through good and challenging times.

Resisting temptation

He has also witnessed the development of the local markets business into the bedrock of Citi’s strategy. The bank has defied the global trend of investment banks withdrawing from smaller countries. During difficult periods – not just 2007-08 but other country-specific crises – it fought the urge to scale back along with many of its peers.

“I’ve gone through the ups and downs with the institution, and while we’ve made mistakes of different types, our decisions on the franchise have been rational,” says London-based Mr Ybarra. “It takes a lot of strength to resist the temptation to leave during times of pressure, and there have been many, but we did. It’s in our core to stay.”

Retaining its sprawling trading operations certainly makes good business sense for Citi. On-the-ground markets divisions tend to survive economic cycles better than similar businesses run from overseas, which are more prone to fluctuations depending on macroeconomics and international investor sentiment.

“We do a lot of rates and currency work for local corporates and institutions,” says Mr Ybarra. “Those businesses are more resilient than those run from offshore, which are more subject to how other markets feel about emerging markets.” Paring back these businesses may have brought some short-term cost savings, but it would also hurt the bank’s long-term prospects.

A winning equities model

Citi’s commitment to local markets has undoubtedly paid off. Greenwich Associates, the banking industry’s main benchmark, recently ranked it number one in fixed income, currencies and commodities (FICC) for the second consecutive year. Traditionally a powerhouse in foreign exchange, Citi has built its rates and commodities businesses into market leaders, and bolstered its institutional investor client base while maintaining its strong corporates business.

Thanks largely to its strong macro business, the investment bank as a whole has climbed the league tables prepared by data firm Coalition. It is also because Citi’s investments in equities – the one secondary market in which it is not traditionally a top player – are starting to pay off.

The push into equities trading began in 2015, after the division was rearranged as part of the bank’s multi-year restructure. Significant thought has gone into the revamped business model. Unlike FICC, banks have been hesitant to divest their equities operations, even for those significantly paring back their investment banks. This makes it a crowded market. 

“It’s a highly competitive environment and if you build too big an expense base, you might one day find that you don’t have enough margin to justify it,” says Mr Ybarra. “So for us, the most important thing was not to be big in equities, but to have a profitable model that can survive through cycles.”

This led Citi to build a business geared towards derivatives and prime services, and one that is not trying to rival the size of equities heavyweights such as JPMorgan, Morgan Stanley and Goldman Sachs.

The early evidence is encouraging. Citi’s equity division is gaining market share and improving its margins, despite the market in general contracting in 2016. In 2017 it is expected to improve, creating a more conducive environment in which to execute its equities game plan. Mr Ybarra is optimistic about its long-term prospects. “Given the trends we see – including the move to passive investment and the types of products that will demand – the strategy we have for equities fits that future market,” he says.

Market making’s future

Where Citi is not looking to make changes is credit trading. There have been many attempts in recent years to make bond markets more liquid and less capital intensive. Some banks have launched agency- or broker-style trading operations to which they commit no balance sheet, and electronic trading (e-trading) platforms have established all-to-all systems which allow investors to trade directly with one another without a bank sitting in the middle.

Citi, however, is sticking by the traditional market-making model for bonds and Mr Ybarra does not see it being challenged by e-trading and other liquidity experiments any time soon.

“Fundamentally, I think that’s because they work when a lot of people are trying to buy and sell, and all you are trying to do is connect them. But in credit markets it’s not a connection problem, it’s lack of natural liquidity,” he says. “There is nothing to stop them from developing if they are the right answer, but if they were, they would already be successful.”

Regulatory roll-backs

In the US, there has been much speculation about what the new administration means for banks’ markets businesses. During president Donald Trump’s first six months, steps have been taken towards delivering on his promise to reel back the post-crisis clampdown on banks. This includes attempts to significantly water down the Volcker Rule, which bans banks from engaging in proprietary trading.

Volcker has hit banks’ trading profits and is often described as the most despised rule on Wall Street. But Mr Ybarra sees things differently. “Volcker has been a big effort. It forced us to change how some businesses operate, but I think Citi would have gone down that path anyway,” he says. “We don’t think it’s had a very significant impact on the business model we would have adopted after the crisis – more client-centric and built on market making.”

While no one knows how much US regulations will change under the new government, Mr Ybarra is not counting on a significant roll-back of Dodd-Frank. He is also part of the growing chorus of senior bankers who are not seeking significant changes, but are sanguine about the overall regulatory climate.

“The things we have already adjusted to, we may as well continue,” he says. “The important thing for us, and what gives us some degree of optimism, is that the tone and implementation of regulation in this last phase of post-crisis reforms may take a friendlier approach.”

Promising backdrop

Regulation aside, the improving global economy bodes well for trading businesses. Growth is picking up in developed and emerging markets, and corporate confidence is returning. Compared with late 2016, Mr Ybarra says the market is now more sceptical about the new US administration’s ability to deliver on its ambitious pro-growth policy agenda, but it has injected a degree of excitement into the markets.

Speaking to The Banker in late March, he said the main geopolitical risk affecting investor sentiment is the French elections, in which the far-right National Front, led by Marine Le Pen, has performed well in polls. At that time, markets were pricing in a second round winner that is not a victory for Ms Le Pen.

“If the outcome is what the market has discounted, there are no other immediate problems on the horizon,” he says, adding: “But the biggest geopolitical risks are the ones you don’t know about, the ones that appear suddenly and unexpectedly.” 

Post-trade connections

In 2013, Citi’s securities services business was brought within Mr Ybarra’s remit. Post-trade operations – which span everything from clearing and custody to fund administration and fund accounting – may be less visible than markets operations, but they are crucial components to the life-cycle of any trade.

Citi spent a good few years streamlining its securities services business to create a one-stop shop for markets clients. The result is essentially an investor equivalent of the bank’s treasury and trade solutions division, which provides cash management services to corporates.

The goal is to make life as easy as possible for clients, and it is particularly useful for those tapping multiple markets and asset classes. While investors are expanding their horizons and looking to invest cross-border, Mr Ybarra notes that clearing, settlement and other post-trade systems have not kept pace. “If anything, the world is going in the opposite direction,” he says. “At the same time that investors become more global in remit, every regulator wants to control their own market so infrastructure is becoming more local and more complex.”

For any client wanting to trade in many markets, Citi’s connections with about 400 clearing systems is a big draw. There are not too many other banks that can boast the same global reach.

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