Citi hosted its clearing roundtable yesterday, against the backdrop of the first OTC clearing wave in the US on March 11.
Global head of Listed Derivatives Jerome Kemp and global head of OTC clearing Chris Perkins reported a smooth first wave migration to central clearing. “The first of March came and went,” said Kemp. “There was nothing exceptional but the clearing numbers continue to increase.”
Kemp said he expects a “big bang” effect in the second wave on June 10 and 11.
The roundtable was hosted a day after the launch of Citi’s new custody services for segregated collateral accounts.
Kemp noted a shift in investment banks’ business models, creating opportunities among banks with trading desks covering numerous instruments, to leverage capabilities in the mid to back office. “It’s looking at what banks can do differently within a common paradigm that presents the opportunity,” said Kemp.
“The real challenge is innovation in replacing the existing revenue stream,” Perkins added. “This will involve re-architecting the service we put forward to our clients.”
Citi and investment banks such as J.P. Morgan and BNY Mellon have presented more integrated offerings for clearing clients, from pre- to post-trade services. In this respect, Citi can act as a clearing member of a CCP on behalf of those clearing, provide the technology and can help optimize collateral, provide the risk management and custody services to the client’s accounts.
Commenting on the importance of the emerging quad-party agreements, linking CCP, clearing member, client and custodian, Kemp said it is too early to gauge their importance for the client. “But the [risk management] role of the custodian is more important than the clearer.
“There is mistrust in the FCM space following malfeasance among entities such as Man Financial. The quality and reputation of the FCM is key. We operate globally and we manage collateral and help clients achieve optimization. Going forward the space will belong to the large banks with the capital base and the investment in technology.”
Both Kemp and Perkins acknowledged the revenue opportunity from central clearing for investment banks in collateral management. They concurred with J.P. Morgan CEO Jamie Dimon’s comments recently that the sizing of the collateral management revenue opportunity is in the $300-500million range. Kemp said: “We can leverage a number of assets to enhance that revenue stream. We can bundle what we provide to clients together, enhancing our revenue opportunity.”