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How Citi set itself to expand in superannuation
After focusing for many years on core custody for its Australian business, Citi has had some recent new business successes since branching out into a full service securities services provider.
The foundations for Citi’s evolutionary spurt in Australia were laid in 2007 with a global arrangement to provide the middle-office services to Dimensional Fund Advisors, which required fund accounting. This also meant using global solutions throughout the network.
With ensuing work on tax and middle-office services, Citi was able to win, in Australia, the full custody and fund administration business of equity funds from another global manager, Allan Gray (formerly Orbis Investment Management) in 2011, which had had an operational presence in Australia since 2005.This was followed up by winning the Challenger Group’s wide range of business last year and Citi now seems poised to enter the super fund market.
But the bank is no stranger to the competitive Australian custody market, nor to superannuation and its complex tax reporting requirements.
As Martin Carpenter points out, Citi has provided master custody to the big corporate Commonwealth Bank Group Super fund for many years too – firstly providing custody and more recently fund administration – which is part of its omnibus arrangement for a range of back-office services for the Colonial group.
Citi’s Markets team has also been working with super funds for more than a decade, providing a number of front-office services, such as transition management, for large portfolios.
Carpenter, the Australian country head for securities services, says the earlier focus on core custody allowed Citi to build scale in Australia. With a lot of offshore brokers and strong local clients it was able to build around the fund administration piece.
“Some clients wanted shadow valuations so we piggy-backed the Securities and Fund Services business around the world, which has gone from presences in 40 markets to 60. We’re the biggest. It’s the platform that gives us the scale and infrastructure to do things such as fund administration.”
While many markets – and certainly Australia – require a local accounting team because of tax complexities, Carpenter says Citi needed to provide a truly global solution too.
“We couldn’t do something different in Australia. Everyone has had to be in sync as we migrated our services.”
Citi tested the wider superannuation market for its appetite for a new provider. The number of providers had, after all, shrunk in recent years. Going back 10-12 years, say, names such as Commonwealth (acquired by NAB), Perpetual (acquired by RBC), AMP/Cogent (acquired by BNP Paribas) and Westpac (whose core custody was acquired by HSBC) were active in the market. More recently, ANZ’s business was acquired by JP Morgan.
Carpenter says: “We had a different proposition, with our geographic spread (this means no, or fewer, sub-custody arrangements). And the market had changed. Costs were more important in a low-return environment. We set about recruiting senior people, such as EnzoCotroneo and David Edwards.”
He says Citi has removed previous lag times in the system and pushed back the cut-off times for corporate actions and settlements.
“Linking this all together for super funds, there’s a new focus on safety and counterparty risk and we’re able to promote the one network… We’ve only scratched the surface in broadening what we can offer super funds.”
Tapping into the rest of the Citi operations, such as the markets business, means it can combine solutions. For hedge funds, for instance, Citi built a combined solution through a hybrid prime brokerage/custody system it calls “prime custody” which means the client does not have to have all the assets sitting on the balance sheet of the prime broker.
“We’re also one of the largest OTC (over-the-counter derivatives) clearers which can allow clients to be more efficient to minimize their collateral,” Carpenter says.
In the future, as super funds grow and manage more of their money in-house, he sees an increasing demand for middle-office services. The challenge for custodians will be to package these up with other services to minimize their administration.
