Citigroup’s Securities and Fund Services Unit Invests
In Technology for Critical Risk Management and Growth
Originally published November 28, 2005
Global Transaction Services (GTS), a business unit of Citigroup Corporate and Investment Banking, generates over $4 billion in revenues and leverages a proprietary network in securities across 45 markets. Global Transaction Services spans three primary fields: securities and fund services, cash management, and trade finance and services. Securities and fund services represents about 30 percent of the GTS business, and includes about $8.4 trillion in assets under custody. It delivers securities operations services, risk management and IT solutions to investment institutions in over 100 countries, as clients increasingly seek to outsource operational functions. The business is also seeing more clients from the hedge fund and derivatives trading arenas, and separately managed accounts are another fast-growing segment. Global Investment Technology spoke with Neeraj Sahai, Managing Director and Global Head of Securities and Fund Services at Citigroup.
GIT: What IT and operational initiatives are you proposing for 2006?
NS: We developed and launched a platform earlier this year for separately managed retail accounts that is rated among the best in the industry. We will continue to invest in that platform and develop it. We’re also investing in providing solutions to the hedge fund and alternative investment space.Another aspect of our technology spending is in the middle office to address utsourcing, a trend that is there in the marketplace and is important for a certain size of investment institutions. We engage a lot of our investment dollars in technologies that enable outsourcing activity to be successfully implemented for our clients. Finally, there are enabling technologies that made this happen. Those enabling technologies are investment in SWIFT standards and XML. These allow different systems to talk to one another, as well as systems that increase the transparency required for risk management for our clients.
GIT: What do you think are the biggest issues for the investment management industry related to deploying technology?
NS: Investment managers are in a space where they face the perfect storm. They need an extreme makeover. Investor sophistication is increasing. They have clients demanding more sophisticated product sets — more instruments in the search for alpha. Over time, with the trend toward globalization, sophisticated pools of capital will grow in Russia, India and China, as well as large pools in other parts of the world. Already, about two out of three high net worth households are outside the US. I see that growing.
Both as a source of money and as a destination for money, we will be more international than ever before. To get more alpha, one has to look beyond simple products. There is the desire to invest in more sophisticated instruments with more sophisticated strategies, extending from plain vanilla, cash securities through derivatives through to commodities. Most of the back office was a second thought for these institutions, so the infrastructure cannot meet this market challenge in risk management, efficiency and scalability. These investment institutions need to find the right partners to deliver these solutions to their clients.
This is where outsourcing comes in. Outsourcing covers a multitude of solutions. How much an institution chooses to outsource, or how much is optimal for them to outsource is a function of their own infrastructure, ambitions to grow, and their business strategies, besides what’s available in the marketplace. Citigroup offers enabling technologies and operations capability, including portfolio manufacturing, direct market access, record-keeping and account maintenance. Citigroup works with clients like a consultant to find the right outsourcing solution for them, which could be technology outsourcing, technology and operations outsourcing, or outsourcing select pieces of the value chain.
GIT: How will you put into practice Citigroup’s vision for IT in its investment management business?
NS: We have to start with the clients in any case. The IT solutions that we embed should be toward the end of finding the perfect client solution. Clients want instant scalability to bring on more customers and access to more broker-dealers for execution. Technology that allows them to scale over many markets is going to be critical. The second aspect is risk management. Clients want technology that shows where operating risks are emerging, for instance, if fails are increasing in a particular market or with a particular broker-dealer. Technology that enables complete transparency is going to be extremely critical for risk management, and getting the early-warning signals that are required to cure those risk problems.
The third aspect is real-time information — real-time reporting of portfolio performance, of how securities are doing and of best execution. Technology that enables this will get most of the investment dollars. Ancillary to these technologies are enabling technologies like XML and SWIFT, which allow standards to develop for different systems to talk to each other. Institutions such as Citigroup spend on technology to put these pieces together. Our separately managed account platform is an example. We built that to use the proprietary technology as well as enabling third-party technologies. The solution is an end-to-end solution. It starts from automated portfolio manufacturing right through to record-keeping and interface with the market and broker-dealers. Clients have the ability to pick different models that make sense to them. It’s a plug-and-play environment for them and allows scalability, transparency and risk management.
GIT: You mention wider use of derivatives and hedge funds as an emerging trend. What discipline should your securities and fund services unit, and other such organizations, follow in creating standards for new instruments such as derivatives, so they can be very rapidly assimilated into an electronic processing and trading environment, as opposed to everyone doing it in a proprietary way?
NS: Citigroup has a very important role to play, and so do other institutions like ourselves, because we straddle both sides of the fence. We deal with regulators as well as the clients. On the other hand, we have a global footprint, so we can influence not just one, but many markets in the world. For instance, we’ve been involved in the advice and creation of many of the infrastructures that exist today in the emerging markets. We also have been and continue to be involved in the development and application of SWIFT standards. We are on the advisory board of the Federal Reserve that deals with clearance and settlement related to credit derivatives. The creation of standards is critical for the development of seamless movement of capital around the world and the use of sophisticated instruments. In the absence of standards, not only does the cost go up, but the risk substantially increases. The operating risk increases and, therefore, so does the capital required by institutions to protect against that risk. To manage that systemically, the role [large institutions can play] is extremely critical.
GIT: What has changed in IT and securities operations and what has stayed the same in the last five years?
NS: Operating risk and the need for a successful operating platform have moved to the forefront. That’s the result of the confluence of forces that make a solid, robust operating platform a critical success factor. The second thing is the regulatory risk. The US mutual fund industry has paid out over $2 billion already in fines. Because regulation is much more restrictive and is taken more seriously, it has led to a stronger operational focus at investment institutions than had not been the case traditionally. The increased need for transparency in risk management is the other change. Finally, globalization is becoming more accelerated. Until recently, the key focus at investment institutions was how they could save costs, for instance, by outsourcing. That’s changed. Now it’s a question of how to enable them to grow. So it’s more a growth-enabling strategy today.
GIT: Has technology changed to keep pace with new ways of working?
NS: There’s still the continuing need for straight-through processing and transparency. Technologies that enable that to happen are clearly required. Technologies that allow for real-time client and portfolio information to flow through are increasingly in demand. Finally, technologies that basically allow for risk management, rapid growth through scaling and effective, flexible client reporting are the ones that are really in vogue.
GIT: What can the securities services at Citigroup look like in two to three years, and in 10 years?
NS: The only thing that’s certain about the future is that it will change. It’s uncertain. But the reality is when looking at securities services, within Citigroup we want to have the best-of-breed solutions for our clients. I see that as a combination of a global solution set and a solution set that cuts across instruments and enables our clients to succeed in the geography they choose. Institutions will want to seamlessly operate across different borders and countries. That’s because movement of capital is easy. Our strategy at Citigroup is to enable investment in different markets and gathering of capital from many markets. We act as the global infrastructure or provider that allows that seamless movement of money across the world with minimal risk and the least amount of friction.
Any industry matures over time. The successful players are the ones who can constantly create value-added solutions and have innovative products on their shelf. The challenge to innovate increases as the lifecycle of products on the shelf is substantially reduced. For example, Toyota developed a chassis that can work on different models of cars. They’re able to cater to different client segments. They can make a Lexus and go to a premium client segment, and make a Toyota Camry and go to another client segment (with the same chassis). The ability to launch innovative products without increasing the level of “customware” at the back end to produce it is the [pre-requisite] for any institution to succeed in the future.
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