Citi sets sights on ETF servicing space

Citi sets sights on ETF servicing space

The rise of ETF assets has been well documented in recent years but less attention is paid to the critical servicing component underpinning passive funds.

That said, as the ETF industry continues to mature and become even more competitive, greater attention is being given to the unsung areas of custody, fund administration and securities lending.

Tech heavy elements around processing and settlement, and of course compliance, are also receiving greater recognition as fund issuers look to fine tune their investment vehicles and keeps costs down by getting the most out of their service providers.

Citi invested heavily in the ETF servicing space last year. In November, it picked up a mandate to provide custody and fund administration for the first ETF from Boston-based EntrepreneurShares designed to track companies based on entrepreneurial standards.

News of the win came after it was revealed earlier in 2017 that Citi had made a renewed pushed to meet demand for passive investments by creating three new business units.

The first covers global fixed-income and currencies beta trading, another concentrates on global ETF research and a third will manage regional ETF sales and business development.

“It makes total sense to me,” one New York-based executive working for a top five ETF issuer by assets told Global Investor. “Citi is a global bank with all of the infrastructure needed to help clients.”

It’s not Citi’s first attempt to crack the ETF servicing market. Jeff McCarthy, now at BNY Mellon, headed up previous efforts.

This time round, Dominic Crowe, Citi’s global head of product strategy for custody and fund services, believes the bank’s approach is more sophisticated.

“We’ve been a little bit behind the curve, but we’ve learned some valuable lessons,” Crowe, who arrived at Citi in 2015 from BNY Mellon, told Global Investor.

“Over the past couple of years the ETF industry has seen rapid and innovative product launches.

“This has meant significant changes to middle and back office investment operations. We’ve been following this closely and believe our technology and operating model is now right up to date.

“For the past two years our focus has been on strategic hires, product development and strategy. Now our foot is firmly through the door and we can focus on relieving the administrative pain points for our ETF client base.”

Given how the ETF industry has matured, some servicing solutions in the market, in Crowe’s view, aren’t quite “up to snuff”.

"Few competitors touch all aspects of the ETF lifecycle from index creation, dedicated research & content, sales, trading & market-making to fund administration & custody,” Crowe suggests. “Fewer still have no conflict of interest from internal issuance or having a competing asset management businesses”

Specifically, Crowe points to Citi's product expertise across primary & secondary activity in each of equities, fixed income & commodities, including related activities such as prime brokerage, derivatives (swaps & options on ETFs) & securities lending of ETF units.

"This affords clients an ETF advisory outcome in addition to the traditional execution only service, where its market-leading total touch platform offers actionable intra-day liquidity," he explains, adding that the firm is confident it can take on some of the ETF servicing behemoths in the US and across Europe.

Seven or eight years ago there were only a handful of firms involved with ETFs.

Now there are more than 100 ETF issuers and over a third of which have more than $1 billion in assets – meaning there’s plenty of business Citi can go after.

The result is an influx of asset managers, some unfamiliar with ETF operations or without the resources or full awareness of how to manage the unique ETF components to which they are unaccustomed.

In November, Citi hired former BlackRock and J.P. Morgan executive Andrew Jamieson as its global ETF product head. 

He has a broad-ranging mandate, across asset classes and businesses to help position ETFs front & centre of Citi’s efforts to align closer with the ETF issuer & investor community.

Jay Mann is leading Citi's global fixed income and currencies beta platform - one of three units created by the bank this year to meet demand for passive investments.

According to Crowe, the dedicated global fixed income beta trading unit  - spanning credit, rates, municipals, emerging markets & currencies - differentiates Citi’s offering from other dealers who have struggled to bridge these differing internal silos.

Meanwhile, Citi’s Agency Securities Lending programme now accepts ETFs as collateral utilizing the IHS Markit lists.

Within the prime brokerage industry, Crowe said the firm is seeing growing interest to borrow ETFs from hedge fund clients using them as a strategic macro hedge.

"We have witnessed significant growth in ETF lending availability in Europe over the last couple of years with industry-wide assets growing from around $17 billion in late 2014 to almost $30 billion today, with actual on-loan balances growing from just over $1 billion 18 months ago to almost $4 billion at the end of the year, according to IHS Markit," Crowe explained.

Last year analysts at Morgan Stanley predicted that the global ETF market will grow to around $9.1 trillion by 2022.

At present the US maintains the lion’s share of the global ETF market, with $3 trillion assets under management - 73% of global ETF assets.

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