The key to new markets is always fully investigating and understanding them, says David Martocci of Citi. Drew Nicol reports
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What has Citi’s experience been in emerging markets recently?
We look at everything from the standpoint of what is best for our clients’ assets and their allocation. We are always looking to expand this aspect of our business and we think our experience in this arena is what differentiates us from others in the market.
Having a viable franchise, which means having tangible assets and the right people on the ground, enables us to develop and grow our emerging market business quickly and with confidence.
Our clients see that and appreciate it both through increased revenues but also through the way in which we manage risk in these markets.
Has the recent market turmoil in Asia affected your strategy in emerging markets?
We haven’t seen any pullback from our client base at all. Our clients are still very willing to participate in lending and generate the substantial additional revenues that are available through our securities lending offering in these markets.
If you look at the sell-offs in China, this is not an institutional securities lending market yet, it only operates in the local broker-dealer world. Volatility in the Chinese market does however impact on Hong Kong, which has always been a major market for us.
What have you had to do to reassure your global clients that Asia is a viable investment option for them?
Our thorough process in opening new markets and educating our clients accordingly ensures that the programme we operate is well understood. With that in mind, clients develop trust and confidence and this is reflected in the growth we have seen in our programme in Asia as well as Europe and the Americas.
How do the emerging markets in Latin America compare to Asia?
The number of viable markets in Latin America is smaller than in Asia. That said, Brazil is still a very lucrative market for lenders and we are seeing increasing volumes and activity there. The challenge with Brazil as an emerging market is the required securities lending structure which utilises a central counterparty (CCP) market model.
Securities lending clients have become accustomed to receiving full title transfer of collateral, which provides them with significant comfort, so models that rely on a CCP structure result in a lower take-up from beneficial owners. It is also worth noting that other investors, such as ’40 Act funds, are also excluded by regulation because of this.
India is a market that some are looking at. Is that the case for Citi?
Citi launched India as a lending market in 2012 but it has only attracted domestic funds to date. We are now developing capabilities to encourage offshore participation. There has been a lot of time and energy spent on it, but we are Citi, so we have the people on the ground. We are looking at Q2 2016 as the date to launch offshore lending.
Is Citi really looking at all possible markets at the moment? Do you see genuine opportunity everywhere?
There are a lot of markets where we have worked with the regulator and found there to be no real opportunity. Everyone is looking for ways to add liquidity to their capital markets but that isn’t always possible.
It is important to find the right balance in a market between investors’ willingness to gain exposure in the market, borrowers having sufficient appetite for the local infrastructure and regulations being viable.
We make sure that we have always fully investigated and understood the viability of the market, by working through all the issues. There are tax, regulatory, process and transactions components to consider. It’s an in-depth process we have to go through before launching in any new market.
As Asia develops and begins to move out of the ‘developing market’ phase, where is next for Citi? What frontier markets are you looking at?
We are exploring many opportunities in the frontier space. With Citi’s coverage globally, we can leverage local expertise and relationships with exchanges and regulators.
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