Citi's head of G-10 rates, risk treasury and finance, Andrew Morton, has pulled the previously disjointed business together since his appointment in 2008, and this cohesive approach has been rewarded with a clutch of happy clients and strong positionings in the rates league tables.
It is a crucial time for the rates business. With many eurozone sovereigns in crisis mode and government debt in the developed world at eye-watering levels, now is not the time to have an underweight rates business. Estimates suggest that in 2012, the US Treasury will issue some $2096bn of debt, eurozone supply will amount to about €739bn, and Japan will issue about Y112,000bn ($1443bn).
Three and a half years ago, Citi would likely have missed out on the huge amount of activity that sovereign debt desks are witnessing as a result. In that period, however, it has managed to transform a surprisingly weak rates offering into an increasingly powerful platform. Now, it is the only US bank that is a primary dealer in every European government bond market. “If it's G-10, then we're in it,” says Andrew Morton, head of G-10 rates, risk treasury and finance at Citi.
Mr Morton, the former head of fixed income at Lehman Brothers, has played a key role in turning that business around. Hired to his current role at the height of the financial crisis in October 2008 by Citi's co-heads of global markets, Paco Ybarra and James Forese, Mr Morton says he was impressed by Citi's bold move; grabbing the chance to bring in a team of 20 people in London and New York even as the depth and scale of its own problems were becoming apparent.
“It was a very challenging time in the markets but they saw the opportunity both internally and externally. Here was an underweight business and the chance to hire good people to build it out. They took it,” he says.
Business overhaul
In truth, it was an obvious move. Rates is a natural fit for big commercial banks such as Citi. Its major competitors, for example, are Barclays Capital, Deutsche Bank and JPMorgan. In the years up to 2008, however, Citi's fixed-income business had focused on credit and structured credit; it took the crisis to show management the error of its ways.
This meant fixing a piecemeal and disjointed approach to the rates business. The bank's regional structure had created a sales and trading effort which was not aligned to a global business. The technology component – critical for a flow business such as rates – was uneven. The focus on structured products meant that sales and trading worked almost independently, which was a poor model for the flow business; here, thin margins and high-frequency trading demands a very integrated sales and trading team.
Citi had not been one of our top-tier rates counterparties pre-2008; it is now
Moreover, the bank's coverage of clients was patchy. Inexplicably, for example, Citi did not have a dedicated sales team covering the largest real money buyers of government bonds and other rates instruments, such as central banks, insurance companies and pension funds. Mr Morton quickly worked to put things right.
Client focus
Citi had – still has – a talented trading team. It just was not hooked into the sales effort. As a result, client-facing sales people were not in touch with those executing the business who were plugged into the market. One of the incoming Lehman team, Cedric Pauwels, now head of European rates sales, immediately set out to build a common approach between sales and trading to ensure that the left hand knew what the right hand was doing. The bank connected up the dots between clients and its top-notch derivatives and rates modelling and the strategy element of the research offering.
Importantly, because Mr Morton's effort was more about filling gaps and reorganising than replacing people, it was a relatively easy sell internally.
The addition of eight Lehman flow sales people meant that the bank could instantly plug some holes in its coverage, but getting clients interested was not always an easy ride. Early on, one major US money manager requested a two-on-one meeting with Mr Morton just so that he and a colleague could sound-off about how poorly served by Citi his business had been over the years. There were similar experiences with other clients.
The team definitely had to prove itself. “Clients are quite used to new management coming in and saying 'I'm here; I'm going to fix everything; it's going to be great.' They've seen that movie before. So, they were happy to let us in but they weren't throwing parties. It was very much a case of let's see how this works out,” says Mr Morton.
One advantage, however, was its huge commercial banking reach, which meant most clients were at least receptive to Citi's re-energised rates business. It did not happen overnight, but the internal reorganisation and persistent effort with clients is definitely paying off. According to data from consulting firm Oliver Wyman, Citi's share of overall Street revenue from the rates business more than doubled between 2008 and 2011. Similarly, in a recent Risk magazine survey, Citi now ranks second for European and Japanese options, third for European and US dollar exotics, and fourth for Japanese exotics. The angry US client says Citi is now his top-rated rates counterparty.
Winning recipe
Ed Devlin, head of Canadian portfolio management at Pimco, says the difference is palpable. “Citi had not been one of our top-tier rates counterparties pre-2008; it is now,” he says. “There were issues around things like consistency of coverage and exchange of information and trading ideas, which were a good reason not to deal with them. Andy [Morton] and his team have done a very good job of resolving them.”
The recipe for winning market share is straightforward, says Mr Morton. You have to give clients reasonably consistent pricing, and have responsive and proactive salesmen. Most importantly, he adds, you always have to be there. “You can't just stop making prices in Italian government bonds for two-and-a-half days in the middle of a crisis because prices are volatile. Clients remember that.”
There was an element of luck, too, admits Mr Morton. “Luckily for our business, even though it was a terrible year for the global economy, 2009 was an amazing, lights-out year for the rates industry. That helped us.”
Citi is not yet number one in rates – with clients it averages about fourth, behind BarCap, Deutsche Bank and JPMorgan – but it is working its way up. Technology will play a key role in getting the bank to the top of the list. One of the reasons that competitors did so well was their compelling client-facing technology and Citi has worked hard to bridge that gap. It hopes that the launch of Velocity for rates (it already has Velocity for foreign exchange), due to be rolled out in the first quarter of 2012, will now help it to leapfrog competitors' older technology.
“One of the advantages of building [a platform] later is that the latest technology people now use for video games or iPad applications is built real-time into our code. [Velocity's] speed and its ability to deliver analytics and for clients to access Citi's pricing – on a 14-year euro swap rate, for example – is second to none,” says Mr Morton.
Opportunities abound
Right now, Mr Morton says there are plenty of opportunities. Governments have a heap of bonds to sell and there is lots of volatility in Europe. And, from a trading perspective, there has been a substantive shift since the European Central Bank's (ECB's) long-term refinancing operation (LTRO) in December, which has given a boost to the market. In the second half of 2011, investors were largely selling and the ECB was the only buyer; since the LTRO, real money is buying, and that is good for the industry, he says.
“In 2005 and 2006, when all spreads were pretty much at zero, it was a terrible trading environment. Now, there is a vibrant market again with real people buying and selling. Obviously, that could all change if things in Europe take another turn for the worse, but for the moment, the market is in a much better place.”
Being in a position to capitalise on that will put Citi's risk capacity centre stage. Three or four years ago, people questioned the bank's capacity (and even its capability) to take risk in volatile markets and therefore to facilitate client business. While he is unable to say how much balance sheet is allocated to the rates business, Mr Morton says the bank has plenty and the appetite to put it to work.
“In these conditions, with this volatility, you need to have a view. You cannot trade these markets hoping that someone is going to sell you $85m in Portuguese bonds and you are going to sell $85m of the same bond five minutes later. You need to know what you're going to do if a client gives you a big bundle of risk. You need to have some guts and be able to handle some profit and loss volatility.”
