Citi: Rates business takes its natural place

“Thankfully, the Citi brand is very strong because this is a tough market to be an entrant. At least we didn’t have clients say, ‘so you’re Citi, who are you?’ It was more a case of, ‘So, Citi, where on earth have you been?’” Andrew Morton, Citi

Andrew Morton’s first year at Citi has passed in a frenzied effort to hire new talent to build businesses that were surprisingly weak there. By focusing so much on credit and structured credit, as well as accumulating a store of toxic waste, the bank risked missing out in the suddenly profitable G10 rates business.

Morton, managing director, global head of G10 rates, risk treasury and finance, is the most senior of 23 colleagues that John Havens hired in just two and a half weeks after Lehman Brothers’ collapse to make sure Citi didn’t miss out entirely. Considering the scale of Citi’s own problems at the time, negotiating those new hires was in itself impressive.

Since arriving late last year Morton has hired nine more managing directors in a relatively low headcount business and he expects each of these to hire more junior staff in 2010.

Why the rush to build? When he arrived, he was surprised to find that Citi did not cover the single-biggest swap user in Europe. In contrast to equities, Citi’s coverage of hedge funds was good but its generalist fixed-income sales force did not cover many of the largest continental real-money buyers of government bonds and other rates instruments. He set to work putting this right, initiating coverage through a six-person sales team of central banks, insurance companies and pension funds that Citi had inexplicably neglected.

“There are some very capable individuals here,” he says diplomatically, “but there were simply not enough of them and they seemed to be held back somehow.

“Fortunately, earlier in 2008, Citi had decided to integrate the sales forces into the businesses, which is not only the more modern way to manage these businesses but actually makes sales even more important.”

Morton appointed a global head of rates and regional heads and began a big push with rates buyers. “Thankfully, the Citi brand is very strong because this is a tough market to be an entrant. At least we didn’t have clients say, ‘so you’re Citi, who are you?’ It was more a case of, ‘So, Citi, where on earth have you been?’”

Rates is a natural business for Citi. “When you look at who is big in rates, it’s universal banks like JPMorgan and Barclays Capital and we very much belong in that group,” says Morton. “We have a natural breadth of expertise. One of my first meetings was with a big money market fund manager who looked at my card and said: ‘Ah, G10 rates, I actually need someone to price a swap in New Zealand dollars, can you do that?’ And of course we can, our scale gives us big advantages in cross-border flows.”

Clients have sat up and taken notice. “The turnaround at Citi in the last year has been little short of phenomenal,” says Nick Griffiths, co-head of rates and duration at Aberdeen Asset Management. “They have come from almost nowhere with us to being one of our top-three firms due to the quality of sales coverage, research and provision of liquidity. They have hired good leaders and it now feels like we’re dealing with a team. The salespeople don’t bother to suggest the kind of trades we don’t do. We get good information by talking directly to the traders and that’s very useful. They’ll tell us trade ideas they are putting on so you feel included. That’s the kind of thing that just didn’t happen a year ago.”

He continues. “It’s very useful to deal with just one firm that deals in every market, from Sweden to Aussie and Kiwi, and that covers you well.”

Morton’s second initiative was to make big investments in electronic trading which he suggests will likely transform fixed-income markets over the next two to three years in similar ways that it already has FX and equities. In the past six weeks the bank has gone from nowhere to become the top dollar swap dealer on Bloomberg and has made big strides on Tradeweb. “Thankfully, we’ve got reasonably good internal technology so we didn’t have to gut our systems to make prices externally, rather just hook up to the external world.”

Partly thanks to this new determination to get it right in rates, partly thanks to richer bid-offer spreads and high volumes, Citi has reaped the benefits of these efforts very quickly. Revenues have shot up as expenses have come down. Morton argues that even should bid-ask spreads compress, there is plenty of juice in rates.

“There is just so much government supply to come in the years ahead and so many more opportunities to trade. There’s relative spreads among the European sovereigns; there’s Libor versus governments and OIS; there’s the huge US pass-through market, and finally there are massively different views on the outlook for long-end Treasury rates which is creating trading opportunities in volatility.”

Being a bigger, smarter, better-known distributor of rates products carries obvious benefits to the firm’s already strong debt capital markets business, not least with sovereigns preparing syndicated deals. Just months after appointing a new head of European government bonds, the bank has recently become the number one bank for taking down German Bunds at auction.

Analysts of Citi stock still question the firm’s faith in its own risk-management capability and therefore its capacity to take risk in volatile markets where good opportunities might arise. When central banks eventually raise rates, be that next year or whenever, they will unleash havoc in the rates markets. That’s when the really smart traders will emerge.

Morton’s business thrives on taking trading views.

“We are not investors but I do think, given the scale of what we see across the markets, that we have an edge in trading and we will put decent-sized positions on for short periods of a week or two,” he says. “And if you go to investing clients and say you have a strong view on the value of the next Bund auction and you are going to take down some, you can find investors lining up with you and suddenly you are taking down a significant share.

“Clients are all desperate to find ways to make money, so a dealer that comes to them with ideas, and has the capital to back those ideas up, is very useful. It’s important not to have a broker mind-set.”