Citigroup’s OTC service illuminates opaque market

According to the Bank for International Settlements (BIS), the notional amount of outstanding OTC contracts, as of June 2010, was USD582trillion, representing a gross market value of USD25trillion. The OTC market has historically been largely opaque, but things are changing. Investors and regulators alike want greater transparency.

In response to this, Citigroup last month rolled out a comprehensive OTC derivative service through its Global Transaction Services division to consolidate and simplify the post-trade execution process. But as Peter Salvage (pictured), Managing Director of Hedge Fund Services at Citi tells Hedgeweek, this was far from being a kneejerk reaction to the Dodd-Frank Act.

“The technology backing this new service has been adapted from our capital markets back office platform. We’ve been developing and investing in a core set of technologies for the last three years. This wasn’t something that happened overnight,” says Salvage. Such investment puts Citi in a strong position as it means it can react quickly to changing market regulations.

Indeed, by using an industrial-strength technology infrastructure, Citi’s OTC derivative service has stolen a march on its competitors, few of whom can claim to offer the same level of sophistication. “We’re a market leader in providing solutions to complex asset classes; this OTC service reinforces the fact,” opines Salvage.

Hedge fund managers can outsource the full lifecycle of an OTC trade to Citi. As an integrated platform it provides full connectivity to Citi’s global clearing network, model-based valuation, confirmation, settlement, collateral and margin management. Hedge funds are typically the most aggressive OTC traders and with the industry calling for central clearing, not only is this bringing, in Salvage’s view, the “start of transparency to the OTC market”, it’s also causing more fund managers to use third party administration services in response to investor demand.

“We expect this to fuel demand for operational services going forward,” says Salvage, adding that as numbers of OTC contracts being centrally cleared increase later this year, “we believe this derivative service will address that need”.

He notes that interest has already been high in Europe where fund managers are used to outsourcing services, estimating that 60 per cent of users to the new service will be hedge funds. Salvage expects roughly 25 per cent of users to be Europe-based, with upwards of 10 per cent coming from Asia “where we’ve seen particular interest in the OTC valuation offering”.

Collateral management, one of the key features of the OTC service, is another important issue at present as prime brokers and exchanges increase their margin requirements but as Salvage explains: “The comprehensive nature of the service is really its strongest feature.”

Interest from hedge funds has been “across the board” says Salvage. Several current prospects are believed to be USD10billion to USD20billion in size. “I’d say we’re more inclined towards mid- and heavyweight funds and strategic start-ups,” adds Salvage.

As to the costs of using Citi’s OTC service, it depends on the number of positions being held and trades executed by the respective fund. “Most hedge funds trade a variety of instruments alongside OTC contracts. Most want bundled support across their asset types, but the choice is theirs,” explains Salvage.

Although the service only went live last month, Salvage is bullish. “We expect to see the vast majority of our clients using this service by end-2012.”

SEB platform hosts Vertex Evolution UCITS fund

Vertex Capital Management Ltd, the London-based investment advisory firm, has launched a new UCITS fund via the SEB Prime Solutions UCITS platform.

This is the fourth launch on SEB’s UCITS platform since its inception in September 2010. The Vertex Evolution UCITS Fund, launched on the SEB Prime Solutions platform, is an adaptive multi-asset class fund with a sub portfolio of external systematic trading managers.

The fund consists of diverse building blocks that play different roles and complement each other. The blocks are built around four objectives – broad risk-controlled market exposures, amplifying returns in equity bull markets, augmenting returns in bear markets, and enhancing return on cash. It allocates capital among asset classes and global sectors/regions based on measures of market volatility, trend and momentum in line with prevailing market conditions. The sub portfolio of external trading managers is structured to perform exceptionally well during periods of high volatility and market stress.

Carl Mauritzon, founder and Chief Investment Officer at Vertex Capital Management, says: “We consider this fund a valuable addition to the fast-growing multi-asset class UCITS universe. The fund provides a turn-key solution for those investors who seek a solid core portfolio foundation. Our strong emphasis on rule-based investing and risk control provides a framework for unambiguous decision making. This is particularly important in volatile environments, where emotions easily take the upper hand. SEB’s excellent support and service presents a strong “platform” which enables us to build a broad distribution network."

Peter Herrlin, Prime Brokerage Sales at SEB, says: “We are delighted that Vertex has chosen us to help them launch their fund. We believe our one-stop-shop approach which enables faster and more cost effective fund launches, coupled with our extensive prime brokerage offering, will continue to attract a diversified range of high calibre funds.”

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APG enables hedge fund seeder IMQubator to create new fund

IMQubator, the hedge fund seeding platform backed by APG, will transform its current Multi Manager Fund into a limited‐life vehicle, while simultaneously developing a second fund, which also will invest in hedge fund start-ups. Both vehicles will be open to other institutional investors next to pension asset manager APG. IMQubator (IMQ) intends to attract an additional EUR100m to its first fund from institutional investors. In a continued endorsement of the funds seeded by IMQ, APG has extended the EUR250m commitment with a term of 3+1+1 years as of December 31, 2011.



The transformation of the current Multi Manager Fund (IMQubator MMF) and the set up of a new fund comes at a time when 70% of the EUR250m commitment by APG has been invested, with a full investment expected by year‐end 2011. IMQ typically invests EUR25 million per emerging manager, who will then be guided and monitored on a weekly basis by IMQ Investment Management.

The current Multi Manager Fund IMQubator MMF will be transformed into a limited‐life vehicle, IMQubator 1, which will be closed for new capital on December 31st 2011. One or two institutional investors will be invited to join APG in this fund with a targeted additional amount of EUR100m. The new inflow will be used primarily to increase the capital invested in funds seeded by IMQubator1.

After the closing of IMQubator1, IMQ will develop a second hedge fund seeding and acceleration vehicle, IMQubator2, to which APG will also commit. In preparation for the establishment of IMQubator2, IMQ will expand its team in the area of investments and operations.

IMQ started in 2009 and recently has received two Industry Magazine awards. Hedge Funds Review elected IMQubator MMF as “Best Seeding Platform 2010” and the readers of Hedgeweek choose IMQubator MMF as “Best Seeding Platform” in March 2011. Additionally, one of IMQ’s invested funds Boston & Alexander has been nominated as best fund in convertible arbitrage at the “Financial News award for excellence in institutional hedge fund management 2011”.