October 2008

INVESTOR SERVICES: We built this Citi

Nicholas Pratt talks to Citi’s Andrew Gelb (pictured) about how scope, not just scale, is driving Citi’s securities and fund services business strategy in EMEA ...  “There is no other securities and fund services franchise that covers such a wide scope of activities,” says Andrew Gelb, the newly appointed head of Citi’s securities and funds services (SFS) EMEA business.

Citi is well known as a big bank and has vied for the title of the world’s biggest with a handful of rivals over the last decade or so. As with many businesses, scale will always play a big part in Citi’s securities and fund services strategy. But Gelb says this is more about enabling operational efficiencies and synergies at a time when clients are becoming more complex and more global. “Our clients need a service provider that has product breadth, the resources to invest in technology and the ability to reach across geographies, as well as be able to customise solutions.”

Gelb’s unit covers the three ‘i’s ­ –  investors, intermediaries and issuers – offering them all a range of back- and middle-office services. The extent of this range leads Gelb to claim that Citi has a unique business model among its peers and that Citi is able to deliver on these services because of the firm’s diversified structure.

“Not only do we have the global reach of an unmatched network, but our clients can also leverage Citi’s strength in the capital markets and therefore extract value across the entire investment value chain. This allows us to do things for clients that few others can do and we have the scale that allows us to invest in and integrate technology platforms at a very high level. This is what defines us as a securities and fund services provider – geographical reach, product scope, scale, customisation and, most importantly, relationships.”  

Regional focus
Given Citi’s geographical reach, it is perhaps surprising that the EMEA region has only now been given its own dedicated head in Gelb, although he argues that the recent appointment is more a formalisation of various roles that have existed for some time.

It is also an indication of the importance of the EMEA region to Citi, says Gelb. “EMEA is many things. It’s a buying centre, it’s a place for inter-regional flows and it’s a rapidly changing environment with new business opportunities. The idea of my role is to have someone across the whole business that can provide oversight and ensure that we get the efficiencies and linkages between the different product areas.

“The reason that the role has been created now is because there is so much happening in the EMEA region. This is not to say that there was not a lot happening before but we have reached a point where there is such a level of activity in the region that it requires an additional focus.” 

This focus will include more bundled services combining elements of custody, prime brokerage and funds, says Gelb as Citi tries to break down the silos and exploit the full range of the firm’s services. He highlights a new product in development called ‘Execution To Custody’, which provides front-end execution through Citi’s broker-dealer, and clearing and settlement at the back end.

Europe is undergoing great change presently, says Gelb, change that is driven primarily by the desire to achieve more of a common market. The role that service providers have to play is amorphous, says Gelb. “The need to provide services across geographic boundaries is becoming more important and that plays to Citi’s natural advantages.”

The Markets in Financial Instruments Directive (MiFID) is the regulatory manifestation of this desire for a common framework. In the year since its launch, has Gelb noticed any effect on the funds market? “I think the full story is yet to be written but what we know now is that MiFID has led to the creation of new trading venues, many of which Citi is involved in as both a broker-dealer and a securities services provider. For the funds industry specifically, the issue is to what degree will these new platforms lead to new trading opportunities and break down some of the traditional barriers between buy and sell-side?”

It is still early days in the establishment of these alternative venues with Chi-X the only platform to have any kind of track record thus far. Of course a similar fragmentation of execution platforms and liquidity sources has been taking place in the US for some years now. As a US-based bank, are there some obvious parallels between developments on both sides of the Atlantic?

“The US market is fundamentally different to Europe where there are several separate markets. In the US the market has gone through the cycle of new emerging trading venues, followed by some consolidation and then more expansion. In Europe, there have always been different venues because there are different countries but it is difficult to say what will become of the new alternative venues, other than that there is bound to be a period of consolidation at some stage.”

In general, says Gelb, the developments should be good news for fund managers. “If there are more competing venues, it should lead to price compression. The challenge will be to ensure that the back- and middle-office processes are in place to handle trading across several venues and that is an area where we are hoping to play a big role in providing pre- and post-trade solutions that cover the whole investment lifecycle.”

Of course, while Citi’s SFS division can call on the wider resources of the bank, its access to these resources will also be subject to the fortunes of the group as a whole. And it is clearly evident that the large US-based banks have been hit hard by the sub-prime crisis and the ensuing credit crunch.

Have the current economic conditions had any affect on the SFS business and are these conditions dictating what kind of services the funds industry in Europe is demanding? 

“We are not immune to economic cycles,” says Gelb. “But I don’t think there has been any fundamental impact on the market so far other than leading firms to look internally at what they should be doing to make themselves more efficient.”

There has also been more growth in the alternatives market and it is an area that Gelb says Citi is feeling quite bullish about, citing last year’s acquisition of Bisys as evidence of its desire to break into Europe’s alternatives market.

“The strategy behind the Bisys purchase is consistent with our overall strategy – being able to service the entire investment value chain – and Bisys provides certain capabilities in the alternative space that we did not have previously. It has also allowed us to develop certain products that we could not before – such as the pricing of complex, alternative assets – and are now able to link with other products for other clients.”

Deals such as Citi’s acquisition of Bisys have been commonplace in the funds services industry in Europe of late with the US-based asset servicing firms and global custodians, such as JPMorgan and BNY Mellon, snapping up a collection of smaller more specialised players in order to gain market share and expertise.

”However, what made our acquisition of Bisys different from others that we have seen in the industry was that it was driven by the need to meet clients’ evolving needs, to expand the scope and geographic reach of our investor services offering – not by the need for scale,” says Gelb. He also expects more consolidation next year as the implications
of the current economic conditions become more evident and several providers that have funds servicing as one of many units realise that it is not a core component and look to pursue merger or acquisition opportunities.

Busy year ahead
As for Citi and its SFS division, Gelb is optimistic for next year’s prospects and he expects growth in all three areas – for issuers, intermediaries and investors. “In the issuer space it would be a case of providing our service in more geographies and more instruments. In the intermediary space the rise of multilateral trading facilities and emerging markets is creating more demand for services.”

For investors, as well as a growing interest in asset pooling, 130/30-related services and the alternatives space in general, there has been great demand for more collective investment services, says Gelb, particularly from the alternatives side and hedge funds and funds of funds.

The development of Citi’s collective investment services, which combine order execution, custody, fund administration and cash management are in keeping with a general trend among investment managers to consolidate the number of providers they use. “Investors don’t want to use a different provider for every service. They want a single provider that offers the full range of services and products and can also bring in further capabilities such as cash management and trade execution, and can bundle these services together in a single package.”

Unsurprisingly, Gelb thinks Citi is best placed to satisfy this market need and expects a busy year ahead. “We are quite bullish about 2009. We have got a lot on.” ©  2008 Funds Europe

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