AWARDS Citi takes second place with six wins

Revenues among the world’s largest investment banks from the sales and trading of G10 currencies have been under pressure since the start of 2016, due to rising costs, while the lack of volatility so far this year has resulted in scant trading opportunities.

In G10 foreign exchange, revenues across the Street fell by more than 20% in the third quarter of this year, compared with 2016, according to a report by financial consultancy Coalition.

“If you look at the market today and the businesses in this space, it’s clear there has been a big reduction in global revenue pools. The data is pretty concerning,” says Nadir Mahmud, global head of foreign exchange and local markets at Citi.

Granted, last year saw several exceptional trading events, such as the UK’s vote to leave the European Union and the election of US President Donald Trump, while this year has offered no equivalent. This flatlining of volatility has hit options trading most, followed by spot markets.

Citi, which slipped to second place overall in the 2017 FX Week Best Bank Awards since last year, still showed its might in the currency trading space with six wins across categories: Best Bank for FX for Corporates, Best Bank for Currency Options, Best Bank for FX Forwards, Best Bank for Structured Products, Best Bank for USD/JPY, and Best Bank for FX Research and Strategy.

This is primarily down to three factors: the sheer scale of Citi, which is active in 140 currencies and has bases in 80 countries; its commitment to invest in technology and its electronic platforms, including Velocity, which serves 82,000 institutional clients in more than 130 countries; and its responsiveness to client behaviour.

I can’t forecast what the global revenue pool will be like in 2018, but we have always been and remain fully committed to FX

Nadir Mahmud, Citi

The currency trading giant has reorganised its salesforce over the past 12 months to better reflect the needs of its customers, moving away from regional account management to a more centralised coverage approach, focused on client segments and high-touch versus low-touch businesses.

But Mahmud is mindful of the challenges facing foreign exchange going forward. Regulation has made it more expensive for all market participants to do business, with the cost of capital and balance sheets rising, while uncleared margin requirements have forced clients to collateralise trades for the first time ever.

Meanwhile, the businesses of institutional clients are under similar pressure. The lack of volatility has hit customers, whose end-clients are increasingly looking to cut costs and move away from complex structures. In turn, margins at asset managers and fund managers have contracted. Clients have also shifted away from active funds and towards passive ones, increasing the pressure on the real-money and fund-management spaces.

Under pressure

“Spreads of institutional businesses are under pressure. Clients have moved away from complex structures to simple ones, like ETFs, meaning that for asset managers and fund managers, the business has become a lower margin and lower revenue product,” Mahmud says.

This contraction in margins in FX has been accelerated further by the growing popularity of multi-dealer venues and the entrance of non-bank market-makers. Standardisation and electronification have driven spot markets to a state of near absolute competition – with forwards and options rapidly moving that way too.

At the same time, the introduction of initial margin requirements in Q4 2016 has increased the cost of operating in the complex product space even higher. On the client side, the push to cut inefficiencies from the FX business is well on its way.

Importance of relationships

Flavio Figueiredo, global head of FX corporate sales and Emea head of the corporate solutions group at Citi, notes the desire to lower FX execution costs is equally strong in the corporate space, where clients have centralised their treasury operations in recent years in search of more efficiencies.

“We have seen clients turn more towards their relationship banks and realise there is no need to have a panel of five banks doing FX for them,” Figueiredo says. “Corporates have also started to use algos, getting increasingly comfortable with the execution style.”

So, while headwinds persist for FX banks, commitment to the space matters more. Mahmud emphasises that Citi remains well positioned to address the structural challenges in the market and stay ahead of the competition.

“I’m cautiously optimistic about next year. I can’t forecast what the global revenue pool will be like in 2018, but we have always been and remain fully committed to FX, and continue to aim to capture a larger share of the global wallet,” Mahmud adds.