Prime Brokerage Introduction

http://www.citigroup.net/citigrouptoday/citigroupworld/cgw040326a.shtml#pbrokerage

Citigroup Global Prime Brokerage: A Prime Part of the Global Corporate and Investment Banking Group

Editor’s Note: What’s Citigroup Global Prime Brokerage, and why is it an important part of the Global Corporate and Investment Banking Group—as well as Global Custodian magazine’s 2003 Prime Brokerage “Best in Class?”
 
Check out the latest edition of the GCIB's Update Worldwide, which profiles Citigroup Global Prime Brokerage in its regular Business Briefings feature. Learn more by clicking on links that lead to a glossary of commonly used industry terms.
 
Welcome to Business Briefings, a section of Update Worldwide that introduces employees to some of the diverse businesses that make up the GCIB. Each issue of Business Briefings covers a different area, providing a general overview of its function, who it serves and how other business interact with it. This month: Citigroup Global Prime Brokerage, a group within Global Fixed Income that provides fixed income, equity, futures and foreign exchange services to clients including hedge funds, an increasingly important client segment for Citigroup.
 
As you read through Business Briefings, you'll notice some words are linked to a glossary that provides quick definitions to help you better understand industry terms you may not be familiar with. Other links will lead you to marketing materials or Web sites utilized by the group.
 
As financial services firms find themselves playing a more significant role in the growth of the hedge fund industry, providing a strong Prime Brokerage business is becoming increasingly important to the GCIB. To make the most of this rapidly developing need, we are building up our Global Prime Brokerage operation, which provides our clients with a full range of services including financing, securities lending, reporting, cash management and capital introductions within fixed income, equities, foreign exchange, and futures.
 
What exactly is a prime broker? Simply defined, a prime broker consolidates clearance, settlement, custody, financing and reporting activities for trades executed with various securities firms into a single account with the prime broker-in our case, Citigroup. The prime broker can also facilitate short selling, a strategy often used by hedge funds and something they cannot do on their own. "What prime brokers do is provide middle office financing to their clients" says Bill Heinzerling, the managing director who heads Prime Brokerage.
 
At the same time, a prime broker can finance both long and short positions and lend securities, including both liquid and special (hard-to-borrow) securities. "We clear their business, do their middle office operational support and finance their positions," adds Tom Tesauro, the managing director heading Equity Finance. "Where we make our money, for the most part, is in the financing piece. Hedge funds use prime brokers to clear their business and to provide them with reporting, but they really need us to finance their positions. They can't do it all on their own."
 
The Prime Broker's Role
"Clients come to us primarily for financing," explains Tom. "We provide access to a large supply of securities, and that's our main selling point." To service their clients, the group has more than 100 prime brokerage staffers in the U.S., Europe and Asia who specialize in traditional prime brokerage activities and provide for synthetic financing (swaps) and global repo. Approved hedge fund clients may also be provided with arranged financing services.
 

(from left): Citigroup Global Prime Brokerage's Steve Malekian, Tom Tesauro and Bill Heinzerling

Securities lending is another important prime brokerage service and desks in New York, London, Frankfurt, Tokyo and Sydney provide access to a substantial pool of securities. Utilizing real-time technology (Prime Locate) to assess market conditions, the desk helps clients find available securities using the Internet. Because they have an extensive network of institutional relationships, the desks can source hard-to-borrow securities while offering a high level of protection against buy-ins.
 
Our prime brokerage clients work with dedicated client service teams who provide one point of contact into all of Citigroup's products and services. The team also handles all customer requests. "Where we really stand out is our customer service," says Tom. "Clients like our service people, and we see that reflected in the customer surveys. They view us as a window into the firm-they don't want to talk to the whole operations group or try to find someone on their own. They just want to talk to their prime brokerage representative and have that person take care of it for them."
 
Clients use Prime Connect, Prime Brokerage's data management suite, for reporting and technology management and reports can be-and usually are-customized for each client. Prime Serve, a data repository, report facility and multi-currency portfolio management system, provides customizable information delivery while Fixed Income Direct, the Foreign Exchange Prime Brokerage Web site, and the Futures Clearing Web site enable clients to have continuous access to their account information.
 

Bill Heinzerling

Hedge fund managers may also come to our prime brokers for assistance as they begin to establish a fund. These start-up services can include introducing funds to service providers who can be instrumental in assisting them as they establish their funds. One such service is providing capital introductions, where clients may be introduced to interested and accredited institutional investors, and the Capital Introduction Group hosts regular investor conferences to facilitate these introductions.
 
What Else Can Prime Brokers do for Clients?
In addition to the services described above, Citigroup Prime Brokerage provides access to related services from across all of Citigroup. Fixed Income clients range from single-product hedge funds to diverse multi-product investment firms trading around the world that employ strategies in relative value, risk arbitrage, market neutral and convergence trading. Fixed Income Prime Brokerage may provide these clients with access to the Yield Book, as well as research on government bonds, mortgage-backed and asset-backed securities and information on investment grade, high yield and emerging market corporations.
 
Prime brokerage customers utilizing Citigroup's Equities operations have access to over 60 world markets and can uplink to 40 for immediate execution. For funds utilizing Foreign Exchange services, Prime Brokerage provides in-house execution and economic research. Clients can also access FX Cross, which allows for anonymous execution of large currency orders.
 
Citigroup holds memberships on most of the major Futures exchanges worldwide and Prime Brokerage clients receive comprehensive pre-trade risk management, real-time pricing and execution from Global Futures Services Online. And clients utilizing Cash Management services have access to WorldLink, Citibank's cross-border banking solution that enables them to access foreign exchange rates and issue payments in over 100 currencies.
 

How it Comes Together
So how do Citigroup's Global Prime Brokerage clients take full advantage of all of the products available to them? And just how does the business identify potential clients? Here are some examples of how it can work:

• The Equity Prime Brokerage group met with an asset management firm and discovered that it was looking to access capabilities involving equities, fixed income and foreign exchange. As a result, the group customized a combined solution that allowed the client to implement a 2x's - 3x's leveraged emerging market debt strategy, with the capacity to grow to more than $500 million.
• Clients can also come to Prime Brokerage through their dealings with other Citigroup businesses. For instance, Smith Barney's brokerage force often discovers during conversations with hedge fund managers that they have unfulfilled Prime Brokerage needs. Financial consultants who are unfamiliar with Prime Brokerage can access marketing materials and contact information on FCLinx and gather the necessary information to present Citigroup's Global Prime Brokerage as an option to their clients.
• Groups including the Investment Banking Division and Global Program Trading have also been instrumental in sending leads to the Prime Brokerage group. This is a way to increase Citigroup's overall involvement with clients, while facilitating communication among different divisions. Both the Convertible and Institutional Sales desks have also made strategic introductions to some of their hedge fund clients.
• In the past year, the Prime Brokerage group has organized a number of internal educational sessions in an effort to get sales/traders and other groups more comfortable with discussing Prime Brokerage possibilities with their existing clients. The group plans to continue to host these sessions for interested divisions.

How Citigroup Prime Brokerage Matches up Against the Competition
In attempting to determine the size of the hedge fund industry, analysts usually place its value somewhere in the area of $700 billion. But as hedge funds are generally unregulated and extremely hesitant to share fund details, there's no easy way to determine an exact amount. However, if the $700 billion figure is used as a pretty reliable estimate, Citigroup Global Prime Brokerage currently has about a five percent market share globally.
 
"When you look at the rankings," says Bill, "everything depends on what segment of the market that particular survey covers. Right now we target hedge funds with assets of $500 million or more. And in the surveys that look just at that marketplace, we do pretty well. But we're looking to shift our focus to firms in the $100 million to $500 million area and to markets in Europe and the Far East. That's where we see real growth opportunities."
 
Most of the larger and more established prime brokers have been in the business since the early 1980s. Citigroup is a relative newcomer to the field, and while the group's been around since 1996, it wasn't a truly global operation until recently. "In the last 18 months we've really built up our international business," says Tom. "Once we did that, we saw that we could really go toe-to-toe with the big guys. When surveys look just at overall size, that's when we don't do well," he points out. "We're not as big as the other prime brokers, but that's because we haven't been around as long as most. It took us years to get to the point where we could say we were a full service provider globally, and now we need to convince people to use our platform. Once we get that shot, we usually do pretty well. We just have to get in the door."

 

 

 

 

 

 

 

 

 

 

As for how Prime Brokerage matches up against the competition, while there are no formal league tables in the prime brokerage business, the Global Custodian Prime Broker Survey, which comes out annually, is considered a reliable benchmark. And in the 2003 survey, Citigroup's Prime Brokerage business received "best-in-class" rankings for its Securities Lending, Financing and Client Service. The business also received extremely high marks from its current clients, and nearly all said they'd recommend the business to their colleagues.
 
In the seven years they've been in business, Citigroup Global Prime Brokerage has worked hard to provide a full-service platform that matches up well against any of its competitors. "We haven't been in this business a long time but now that we have a full menu of services we can say that we have it all and we can back it up," says Bill. "It's a perceived lack of experience that has put us behind and it's our job to prove we can do this business as well as anyone. We might not have as many years in the business as some of our competitors, but put us in the ring with the heavyweights and we'll go 15 rounds."
 
Citigroup Global Prime Brokerage: Additional Information and Contacts
For more information on Citigroup Global Prime Brokerage's capabilities, check their marketing Web site or read the attached brochure, which provides an overall view of prime brokerage services. You can also view their U.S. and London pitch books.
 
If you'd like to contact someone in Global Prime Brokerage for more information about their business, please contact any of the following:
 
<!---->Glossary
 
Arranged Financing: A method of financing that allows for leverage greater than Reg T (Reg T regulates the amount of credit that brokers can extend to their customers).
 
Equities: Equities are any stocks that represent ownership in the company issuing them, encompassing common stock, preferred stock and warrants.
 
Fixed Income: Fixed income refers to investments that pay a predetermined regular rate of return until maturization. These can include debt-bearing instruments such as money markets, corporate bonds or financial futures.
 
Foreign Exchange: Foreign exchange includes the handling of foreign trades and the physical movement of currencies from one country to another.
 
Futures: Futures are commodities that are sold to be delivered at a future date. They're sold at the request of an investor who holds an option to buy at a certain price as long as the option is exercised by a predetermined rate.
 
Give Up: When one broker executes an order for another broker's client, the commission gets split, but the client doesn't have to pay extra.
 
Hard to Borrow/Special: Stocks that are difficult to borrow due to limited supply and an increase in demand via short selling. The more difficult a stock is to borrow the less stock there is available to short.
 
Hedge Fund: An investment company for a small number of large investors (usually the minimum investment is $1 million). Hedge funds can use high-risk techniques such as short-selling and heavy leveraging that are not allowed for mutual funds.
 
Prime Broker: A Prime Broker (i.e., Citigroup Global Prime Brokerage) allows clients to custody, clear and finance trades with the Prime Brokerage firm while executing trades in-house or at other firms.
 
Short Selling: The sale of a security the seller does not own, based on the belief that the seller will be able to buy it back at a lower price. Short sales can only be executed through a brokerage margin account.
 
Swap: An agreement between two counterparties to exchange payments based on the change in price of an underlying asset and pay/receive a financing London Interbank Offering Rate (Libor) on the asset.
 
The Yield Book: A proprietary analytical system used by 82 of the top 100 U.S. fixed income investment managers that provides access to Citigroup's extensive databases, financial models and analytics for use in portfolio, risk management and securities analysis.