Citi shockwaves prompt rush for new PBs

BNP Paribas, Deutsche Bank, HSBC and NatWest said to be onboarding Citi’s former clients

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Onboarding: Citi’s rivals are reported to be picking up business from firms clipped from its client list

Shockwaves have been felt through the foreign exchange prime brokerage (FXPB) business since Citi gave notice to several high-frequency trading firms, according to industry sources – with market participants now nervous about relying on any one bank and looking to add to their PB relationships.

Citi’s rivals are reported to be picking up business from customers clipped from its client list, with one PB claiming to have the longest pipeline of onboarding it has ever seen.

A senior FX market infrastructure source tells FX Week: “If you look at what’s happening with Citi’s FXPB, the bank goes to great lengths to say it is fully committed to that business, but as they exit clients, products, maturities and currencies – and because they were such a big part of the FXPB market – there is a real perception that people don’t have confidence [that] their FXPB will be there in the long term. It’s created a big cloud of doubt.”

Last month, Citi told the largest electronic market-makers in currencies they had just 90 days to find a new PB. The cull is part of a wider effort to reduce risk in the bank’s FXPB business, which suffered a reported $180 million loss last year.

It is estimated that Citi had a 40% share of the FXPB market. It was the credit intermediary for direct streams provided by non-bank liquidity providers (NBLPs) – connections that will now have to be re-established with other FXPBs.

On the sidelines of the Risk Live conference in London on June 27, an attendee bemoaned Citi’s exit. He said it had thrown a spanner in the works of a direct-streaming connection it had been aiming to conclude with one NBLP. And, because Citi was the FXPB, this project was now in limbo, and other firms were in the same spot.

Citi’s clients have called us… They are also clients who haven’t been put on the [Citi cull] list but are just looking for a bit more stability than they have
Head of prime services at a bank

Rival PBs are now scooping up clients that have been shut out of Citi’s doors. According to six prime broking sources, BNP Paribas, Deutsche Bank, HSBC, JP Morgan and NatWest are among the banks thought to be taking on Citi’s former clients.

One bank’s head of prime services says: “Citi’s clients have called us. But they are not just funds with smaller assets under management and high-frequency trading firms. They are also clients who haven’t been put on the [Citi cull] list but are just looking for a bit more stability than they have.”

Similar comments were made by a second FX source at one of the banks mentioned, although two industry sources say some smaller clients are struggling to find a new FXPB home.

Rivals claim Citi had underpriced its FXPB business for years by subsidising it with trading income. The head of PB at a second bank says firms that viewed FXPB as a standalone business lost market share or did not get mandates because they were seen as being expensive.

Back in line

The second PB head says: “What is happening now, all this noise you are seeing in FXPB, all those firms who veered off the path from what FXPB was meant to be, now they know they have to get their offerings back in line with what the original model was.”

He adds that potential new clients may have to adjust their expectations on pricing: “We have been benefiting from the fallout. But firms that think they are going to move the business into me at the same rates… are delusional.”

A lot of the firms that have left Citi tend to traffic in both over-the-counter and cleared markets, especially those doing basis trading, the second PB head says. His bank would look at a portfolio through the lens of its collective return on economic leverage and return on gross customer profitability. Clients who “try to push us beyond our pain tolerance” will not be accepted.

Some of those in the market for a new FXPB say they have already experienced bottlenecks in onboarding, but that is refuted by one of the banks cited as picking up Citi’s business. The head of prime services at the first bank says: “I can’t speak for other PBs, but we don’t have a problem onboarding clients.”

Additional reporting: Kris Devasabai and Mikael Latreille

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