Europe, Africa and the Middle East

Future of Investment: The Next Move

Welcome to the Age of ‘Hedge Fund Lite’

Bringing Asset Pooling to a Broader Market

A Step-By-Step Approach to Mastering Risk

Back to Basics in Securities Lending

Redefining the Custody Landscape

Middle East Markets on Recovery Path

The Next Move

Investment ManagementReview

An Update for the Investment Management Industry

June 2009

1 Introduction

3 Future of Investment: The Next Move

6 Welcome to the Age of ‘Hedge Fund Lite’

10 Bringing Asset Pooling to a Broader Market

14 A Step-By-Step Approach to Mastering Risk

19 Back to Basics in Securities Lending

22 Redefining the Custody Landscape

26 Middle East Markets on Recovery Path

30 Industry Recognition

31 Contacts

Investment Management ReviewAn Update for the Investment Management Industry

Contents

Seeing the world through

the clients’ eyes - a key

determinant to success.

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IntroductionWelcome to the summer edition of Investment Management Review. Timed to coincide with Fund Forum, which Citi has supported since 1994, this issue picks up on the main theme of the event: the future of the asset management industry.

We report on a ground-breaking study by the independent think tank, CREATE-Research, co-sponsored by Citi and Principal Global Investors, which surveyed 225 investment asset managers in 30 countries to assess how client behaviour is expected to change in the wake of the bear market — and how firms should respond. For anyone expecting a return to ‘business as usual’ the findings make for a must read report.

Of note is the need for firms to reassess their business model and move to a variable cost structure — in both pay and processes. They must focus on what they do best and streamline their product offerings. Above all, the survey suggests the winners of tomorrow will be those firms that work to understand what different client segments want and deliver it in a high-service environment. Seeing the world through the clients’ eyes will be a key to success.

In another forward-looking article, we look at the continuing convergence between the long-only and the alternative ends of the investment management spectrum. Old labels are becoming increasingly outworn as more ‘hedge fund lite’ UCITS products emerge from traditional and hedge fund firms alike.

Also in this issue we look at recent developments in cross-border asset pooling, risk management and custody. In all these areas, Citi is helping to create new structures, products and services that address major issues of cost, efficiency and control or facilitate our clients’ growth plans. We remain committed to developing market-leading solutions to help our clients take on the challenges of a changing world.

I hope you enjoy this edition of IMR.

Jervis Smith Global Head of Client Executive Global Transaction Services, Citi

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In the space of just seven years, the asset management industry has been hit by two of the four worst bear markets to have occurred in the past 100 years. The last one wiped out USD15 trillion in assets and destroyed 15 years’ of capital gains in the space of 18 months. The CREATE—Research study, co-sponsored by Citi and Principal Global Investors, sets out to determine how these events will affect client behaviour going forward, how investment managers should respond, and what will differentiate winners from losers — in terms of business model and products alike.

The study is based on a three-tiered survey of investment managers involving focus groups, an electronic survey and follow-up structured interviews. In all, some 225 investment managers from 30 countries participated. They managed a combined USD18.2 trillion in assets — down from a peak of USD25.4 trillion in July 2007. The survey provided the global reach, the interviews and

the subject depth. Together they provide key insights into recent events and their future impacts.

One message stands out: once the worst of the current turmoil is over, there will be a flight to quality, simplicity and safety. Quality will be defined by consistent, risk-adjusted returns; simplicity by transparency and liquidity; and safety by capital protection. Clients’ new mantra will be ‘back to basics’.

Mainstream asset classes will far outweigh alternatives in client choices. Granted, there will also be periodic opportunism to capitalise on areas such as distressed debt while high-net-worth individuals will remain in the active space and seek alternative investments. However, retail clients will be drawn into products that offer capital protection and tax efficiency.

Loss aversion here will be rife — as it will be for defined benefit clients that are being forced to change the way they invest by persistent losses, covenant risk and demographic dynamics.

Three Scenarios

How will these trends affect the investment management industry? Three scenarios present themselves. At one extreme is a commoditised industry in which clients’ investment choices are largely driven by capital protection. The pace of commoditisation may accelerate in the event of regulatory overdrive. Some 34 per cent of survey respondents subscribe to the commoditisation scenario, which is in line with what has already happened in Japan. However, many are not tooled up for products with low return, low risk, low volatility and high liquidity features.

At the other extreme is what one might term ‘a vibrant industry’ in which managers put their clients’ interests first. Some 17 per cent of respondents subscribe to this scenario. Here, the winners will be those firms that align the interests of managers and clients with a value-for-money fee structure, products that ‘are fit for purpose’ and high quality service.

Future of Investment:The next move

Amin Rajan, Chief Executive Officer, CREATE-Research, details the results of a ground-breaking study that explores how the market dynamics of the funds industry will change following the events of the past 18 months. The message is clear: firms must adapt their business models and focus on what the client really wants.

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The third scenario sits between the other two. It envisages a segmented industry with a fragmented food chain and a focus on different client segments. Nearly one in two respondents subscribes to this scenario. Each client segment is expected to have a special theme: liability-driven investment in the defined benefit space; advice in the defined contribution space; capital protection in the retail space; and active management in the high-net-worth individual space.

Introducing a Variable Cost Base

The starting point for dealing with the new challenges is to review the business model. That, in turn, needs to start with costs. Gross revenues across the industry fell by around 35 per cent in 2008, with a further 15 per cent drop in prospect in 2009. A variable cost model is essential in providing the shock absorbers capable of cushioning exceptional revenue falls. Yet, only 13 per cent of respondents say their costs vary ‘to a large extent’ with levels of activity.

The psychological barriers to a variable cost model are now crumbling. More firms are introducing variable pay structures and considering outsourcing elements of their front, middle and back-office activities to create economies of scale and scope. Some 37 per cent of respondents have already outsourced the back-

office. The number is expected to double in the future. One in five firms has outsourced the middle-office. Again, the number is expected to double.

The effect of this process is to create a distinct craft focus at the investment end, customisation at the distribution end, and standardisation at the administration end. Actual and virtual boutiques are being created. These moves are important in blowing away entrenched processes that have long conspired against client interests as well as operating leverage.

Focus is Key

The second area is to streamline the product base to focus on core competencies. More than ever, large firms are now recognising that they cannot be ‘jacks of all trades’. They are forced to make a choice between manufacturing and assembly. The latter is emerging

The winners will be those firms

capable of seeing the world

through their clients’ eyes, meeting the

product requirements of

a changed marketplace.

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as a major competency in its own right, underpinned by external sub-advisory alliances. A new supply chain is emerging in which fees have a low fixed component and a variable component.

Some 41 per cent of respondents have already pruned their product range. In some medium and large firms as many as 300 products have gone. Hitherto, in the absence of flexibility on the cost side, large houses had relied on an ‘all weather’ portfolio to maintain revenue in bad times as well as good. As with outsourcing, many now recognise that product pruning has to have a strategic intent that clarifies what the core capabilities of the business are and how they can best be deployed.

Putting Clients at the Centre

The third, and perhaps most vital, area of change is in client engagement. The study clearly shows that tomorrow’s winners will be those firms that espouse the ‘vibrant industry’ scenario detailed above. That means putting the client at the centre of all they do. In the past, the asset management industry has been too supply-driven. Firms have sold what they have in their range, not what clients have needed. That must change.

Managers have identified four sets of features for a winning business model:

Investment capabilities that 1. centre on people talent, fundamental research, disciplined replicable processes and deep insights into asset allocation, cross correlation and trade-offs between risk, return, liquidity and volatility.

Clear alignment of interest 2. between managers and their clients. In addition to a value-for-money fee structure, this includes performance-based incentives, transparent compensation systems and execution costs, and regular inter-industry cost comparisons.

Service excellence — this means 3. understanding client needs, selling products that are fit for purpose, giving accurate and timely information, providing periodic investment reviews and establishing internal panels to protect and further client interests.

Top-level business capability. 4. Firms will need the executive skills to manage alliances, good customer relationship management, dedicated innovation and quality assurance processes.

Refusing to Change is Not an Option

The worst of the crisis is seemingly over, but it has triggered a chain reaction that will endure long after the markets recover. Of interest is the fact that a clear majority of survey respondents expect at least one more systemic crisis to occur in the coming decade. The implication of this is there will be no return to ‘business as usual’.

Three messages emerge from the survey. Firms need to review their business model. Many have operated bloated cost bases with inflexible pay structures. Now, they must become ‘lean and mean’. Above all, they need to put a variable cost structure in place covering both people and processes.

Second, they need to slim down their product range and focus on core capabilities, retooling where necessary to meet changing client needs. They need to make a choice between manufacturing and assembly. Already, 17 per cent of respondents have outsourced manufacturing and their number is expected to quadruple.

Finally, the industry needs a radical shift in governance and attitudes to align managers’ interests with those of clients — on charging, reporting, service and administration. The winners will be those firms capable of seeing the world through their clients’ eyes, meeting the product requirements of a changed marketplace. In short, investment managers need a new narrative on what they stand for and what they can deliver.

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Tentative signs of convergence between traditional and alternative investment managers have been around for some time. Lately, they have been apparent for all to see. A new vehicle, dubbed ‘hedge fund lite’ has emerged — and is being sponsored as a Undertakings for Collective Investments in Transferable Securities (UCITS) product by firms from both ends of the industry spectrum. At the same time, a small number of hedge fund managers have started turning their hands to long-only investment. Convergence is fast becoming reality.

‘The old labels are starting to look a bit worn,’ says Richard Ernesti,

Global Head of Client and Sales Management for Investors at Citi’s Global Transaction Services. ‘Increasingly, firms will be viewed not as long-only or alternative but as alpha or beta managers, depending on whether they generate absolute or relative return. While beta products such as exchange-traded funds are becoming increasingly popular, people will pay a premium for genuine alpha.’

Several factors have combined to accelerate the convergence process in the alpha space. Traditional managers that have lost inflows to their competitors in the alternatives market are

having to rethink their role after the disaster that was 2008. Even some well managed funds that beat their index benchmark by several percentage points in 2008 lost money and failed to endear themselves to their investors.

‘An absolute return capability is a useful weapon in the armoury for long-only managers that have lost inflows to alternative managers in the past,’ says Mr Ernesti. More and more multi-manager funds are investing in absolute return products for their alpha and ETFs for their beta. Relative return products are being squeezed.

Welcometo the Age of

‘Hedge Fund Lite’The divide between long-only and hedge fund managers is becoming increasingly blurred as convergent approaches emerge in the UCITS space. More than ever, investment managers need an administrator with expertise in both areas.

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The UCITS III regime, with its more relaxed approach to the use of derivatives and leverage, has provided long-only investment managers with a platform on which to spice up their strategies. A recent survey by Bank of America Merrill Lynch found that 76 per cent of institutional managers were planning to use derivatives in their mainstream funds. Many are already using Over-the-Counter (OTC) instruments while hedge fund-style performance fees are also making an appearance. Absolute return (or ‘hedge fund lite’) funds are proliferating.

On the other side of the fence, hedge funds are being pressed by their investors to deliver more transparency. In the wake of the Madoff affair, well regulated, European-domiciled funds have suddenly become hugely attractive. ‘We are seeing a lot of enquiries from Cayman-domiciled groups looking to re-domicile in Europe and convert to UCITS,’ says Catherine Brady, EMEA Head of Fund Services, Global Transaction Services, Citi. ‘They are not looking for in-country registrations to go retail: they just want the UCITS label,’ she says.

Several hedge fund groups have already taken the UCITS III route. One of the earliest was Marshall Wace, which launched an open-ended UCITS version of its Amsterdam-listed hedge fund, MW Tops, in November 2007. Also in 2007, Insight Investments, the asset management arm of HBOS which spans both the absolute and relative return markets, replicated a range of Cayman-domiciled absolute return funds under UCITS III. Since then, the likes of GLG Partners, Odey Asset Management and Brevan Howard have all followed suit.

While more liberal than previous regimes, UCITS III still imposes certain limitations on asset eligibility and leverage, which

reduce its applicability to some hedge fund strategies. Nonetheless, Aquila Capital, a German investment manager, broke new ground earlier this year by launching what is believed to be the first managed futures fund to comply with the UCITS rules. With a minimum investment of just EUR1,000, the fund was partly targeted at the retail investor market. The ability to diversify the investor base is clearly a major stimulus for many of these fund launches.

There is one cloud on the horizon. It is the ability to apply Value at Risk (VaR) budgeting measures in so-called ‘sophisticated’ funds that has allowed many hedge fund managers to work their way around the UCITS restrictions. However, the Committee of European Securities Regulators (CESR) is currently reviewing the two risk measurement methodologies permitted in the UCITS regime — VaR and the commitment approach. If VaR were to go, it would hamper a number of strategies.

Limited convergence is also taking place in the opposite direction. Hedge fund firms, such as Thames River Capital, have bolstered their range with the addition of long-only funds. Marshall Wace has taken a team with long-only management experience and is contemplating following suit.

The All Seasons Fund, managed by IKANO Fund Management in Luxembourg, highlights the increasing convergence between the traditional long-only approach and the hedge fund marketplace. Launched over three years ago, the multi-manager fund recently moved from a strategic to a ‘dynamic asset allocation’ approach. Says Henk van Eldik, IKANO Fund Management’s Head of Fund Distribution: ‘We realised that just trying to generate alpha was not enough. In most funds, asset allocation is not reviewed often enough. We were looking

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at the top of the pyramid for the 1 per cent of alpha rather than the bottom where 90 per cent of returns are realised.

‘We start from a cash base with a long list of investment ideas,’ he says. ‘Rather than diversify across all asset classes, we boil our ideas down to a short-list, identifying those areas where there is a good reason to invest at that time. We then decide where there is value from an active manager or whether we should go passive, then we invest’. The fund is currently heavily concentrated in Japanese smallcap shares, and corporate and high yield bonds.

Mr van Eldik notes a number of trends in the marketplace. Increasingly, he says, bank-owned investment managers are expanding into alternatives such as real estate and private equity to complete their product offering. ‘The problem is that they lack competence in managing lots of different asset classes. Others, with good records, are taking the opportunities offered by UCITS III to seek additional returns with 130/30 funds. But you need to be a good market timer as well as a stock picker,’ he adds.

With the increasing use of derivatives and the spread of absolute return products, it is vital that firms have an administrator with a depth of experience in the administration of both long-only and alternative funds, says Catherine Brady: ‘There is no one platform that will process the full spectrum of instruments. The challenge is to streamline the information into common data warehouses and deliver it to the client in a standardised fashion as part of a consolidated view.’

As a leading hedge fund administrator, Citi has developed solutions to cope with a broad diversity of portfolios, styles and instruments. ‘We have leveraged

our global footprint to develop centres of excellence that give us the capability to manage big volumes quickly and effectively,’ says Ms Brady: ‘One example is in the area of pricing where we have centralised teams in the US, India and Europe, who can ‘follow-the-sun’ and meet the toughest reporting deadlines. Another is the provision of customised and ‘off-the-peg’, modular solutions from across the font-, middle- and back-offices. An area in which Citi is practically unrivalled.

Will the convergence process continue? UCITS III has given both sides of the investment management industry a highly flexible tool with which to promote advanced strategies. The hedge fund industry is responding to the pressure to launch regulated, European-domiciled funds, while at the same time taking the opportunity to broaden its customer base. Traditional long-only managers are responding to old-fashioned competitive pressures and increasingly tackling the hedge funds in the alpha space. The asset management industry is changing — and quickly. That change looks irreversible.

Clearly, investment managers must partner with their providers like never before to implement resilient business models that can withstand the tests of the future and deliver the value they have long promised to their customers.

Managers must partner with their

providers like never before to implement

resilient business models that can

withstand the tests of the future.

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Bringing Asset

Pooling to a Broader

Market

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The pan-European pension scheme has been a long time coming. The Pensions Directive of 2003 was supposed to pave the way for a single entity to provide pensions across the European Union. However, there is still much to be achieved before this can happen. The cross-border provisions of the directive have been implemented in different

ways by different countries and harmonisation is some way off. Consultations on improving the directive continue, however, a European pensions ‘big bang’ seems as far away as ever. In a recent panel discussion in Brussels, it was claimed that only five new cross-border pension schemes had been set up since the directive was adopted.

While Luxembourg, Ireland, Belgium and the Netherlands have all sought to establish themselves as centres for European pensions by launching pension pooling vehicles tailored to the needs of pension schemes; the creation of a pan-European pension scheme still requires a host of tax, regulatory and legislative obstacles to be addressed.

A new, multi-client asset pooling platform from AEGON Global Pensions, developed with Citi, brings pan-European pensions pooling within the reach of smaller and medium-sized multinational companies.

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Asset Pooling is Here

In one area — asset pooling — progress has been made. Pooling involves the co-mingling of assets in a single account within a tax-transparent vehicle, such as those mentioned above. This avoids, or minimises, the loss of any tax advantages that would accrue to pool participants were they investing directly. Where the tax status of different participants varies, a global custodian must manage multiple tax rates and account accordingly to each participant.

A number of very large multinationals, including Unilever, Shell, IBM and Nestlé, have either introduced cross-border asset pooling for their European pension schemes or are in the process of doing so. The attractions of pooling are clear. Schemes achieve better governance, improve operating efficiency and risk control, and gain the benefits of unified investment management and custody arrangements. By being part of a large pool, smaller country funds get access to top-of-range investment managers and are better able to achieve diversification of assets.

The European Federation for Retirement Provision has estimated the benefits of cross-border asset pooling for the average multinational at EUR1.2 million a year. Other estimates have put the annual gains at around 20 basis points. They stem in the main from lower administration costs, reduced brokerage charges and custody fees and the avoidance of tax drag.

The Pressure Mounts

The pressure to apply a centralised approach to pensions has intensified of late. With the implementation of the IAS 19 accounting rule, pensions are now highly visible on the balance sheet. The savage bear market experienced over the past two years has increased the urgency of achieving optimal control and governance over multiple

schemes, some of which may now be materially underfunded. Multinationals, particularly those that have grown rapidly through acquisition, often find themselves saddled with a plethora of different consultants and investment managers. Not unreasonably, they want to achieve the same benefits for pensions that their international scale has achieved in treasury management, IT and administration.

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However, there is substantial upfront cost to putting a pooling entity in place. Only the biggest corporates can justify the outlay. It is also very time-consuming. And to date, single-company pooling solutions have largely been restricted to self-administered funds.

Off-the-Shelf Asset Pooling Solution

Now an off-the-shelf pension asset solution is in place for multinational corporations that either do not wish to set up their own platform or lack the scale to do so. AEGON Global Pensions, part of the Dutch life and pensions concern, AEGON Group, has established a multi-client platform with Citi that permits the tax-transparent, cross-border pooling of assets held by different types of institutions — from pension schemes to insurance companies. The pooling solution has been developed primarily for the pension schemes of medium-sized multinationals and is currently available for pooling funds domiciled in the Netherlands, the UK and France. Its scope will be extended further over time.

‘The new platform makes asset pooling a reality for a much broader group of companies than before,’ says Martijn Tans, Director Marketing and Product Development, AEGON Global Pensions: ‘Until now, asset pooling has been the preserve of the very largest multinationals and required a fully bespoke solution that could take years to implement. What we are offering is more standardised. It is much easier to put in place.

The AEGON platform uses the Dutch Fonds voor Gemene Rekening (FGR) structure as a tax-transparent vehicle, thereby minimising the impact of withholding tax. The solution is the result of a three year collaboration between AEGON and Citi, which will also serve as custodian of the assets. Karen Zeeb, Director, Head of Pooling Product EMEA, for Citi’s Global Transaction Services says: ‘The tax implications are only one aspect of the structure. Our solution has been built to accommodate everything from securities lending to performance measurement. It is unique in many ways; incorporating the ability to meet the diverse investment objectives of different investment managers whilst being scalable and highly flexible.’

Multi-Manager Approach

The AEGON pooling vehicle is offered as a complete, bundled solution including asset management and custody. Asset management is provided by AEGON subsidiary TKP, which operates a highly successful multi-manager platform. With 23 multi-managed investment pools, TKP blends the styles of the world’s leading investment managers to fit the strategy of its pension fund clients. It draws on a diverse range of asset classes — from equities and fixed income to alternatives and real estate. It won the European Pensions Multi-Manager of the Year award in 2008 and has been short-listed again this year.

The market for cross-border pensions may still be in its infancy but research by consultants Towers Perrin two years ago found that one in four companies surveyed was planning to set up a European pension fund within ten years. ‘Asset pooling is another methodology to bring all the assets together,’ says Mr Tans: ‘It should be viewed as the first, and at the moment most practical, way of achieving a harmonised, unified solution — with all the economies of scale, governance benefits and cost savings that implies.’

Until now, however, that route has only been open to the very biggest schemes. Says Mr Tans: ‘A single scheme solution is only feasible for a fund with EUR2 billion or more in assets. Now asset pooling is a reality for a much broader group of companies.’

The new platform makes asset pooling a reality for a much broader group of companies than before.

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Risk management is now a hot topic in the investment management industry. From the front-office to the back, from the management board to the compliance team, the ‘R’ word is now on everyone’s lips after a year that proved even the most hypothetical of risks could become manifest. Investment managers experienced a rare combination of extreme investment, liquidity, counterparty and operational risks in 2008. That has heightened the need for robust processes, systematic monitoring and a reporting system that goes to the top of the organisation.

Whether that last element of the jigsaw is always in place is a moot point. A global survey of investment managers earlier this year by the Copenhagen-based firm, SimCorp StrategyLab, found that, while three-quarters of the 90 firms surveyed saw the need to increase the strategic influence of risk management functions, the number with risk-control officers reporting to the board had actually dropped since 2007.

‘The culture has to change,’ says Sean Quinn, Head of Fiduciary Services EMEA, Global Transaction Services, Citi. ‘In big organisations, there is often conflict and confusion between the roles of risk management, compliance, audit and legal. Risk managers are often tucked away looking at credit risk or portfolio risk but nobody has a complete overview.’

Identifying Risk Exposures

External pressures on investment managers to demonstrate good risk controls are mounting. Undertakings for Collective Investments in Transferable Securities (UCITS) legislation requires funds that use complex derivatives to monitor risk on a regular basis. There is a similar obligation under International Financial Reporting Standards

A Step-By-Step Approach to

Mastering RiskThe events of 2008 were a reminder that risk comes in

many forms. Investment managers need a multi-layered

approach to managing them.

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(IFRS), which require all risk exposures — by currency, asset class, counterparty, etc. — to be monitored.

Institutions such as pension funds are placing more emphasis on risk analysis, management and reporting in their manager selection criteria. Additionally, as more investors insist on using managed account structures to access hedge funds, so too are they demanding detailed reporting on everything from portfolio positions to the placement of cash.

Given the close correlation experienced in the performance of so many different asset classes last year, portfolio managers are being asked to look beyond asset-class diversification in assessing investment risk. Increasingly, factor-based models are being applied that identify the worst-case scenario for each of a portfolio’s major risk factors and that quantify the extent to which each asset class is exposed to tail risk in that area.

Risk management solutions have historically been seen as front-office tools to support the portfolio manager. Increasingly, given the IFRS and UCITS requirements, management companies are turning to independent sources for a regular Value-at-Risk (VaR) analysis, which, in turn, can be shown to the auditors. As part of its middle-office services, Citi offers a full VaR analysis that can be decomposed by country, sector, asset class or security. The same service can be run for the portfolio manager on a daily basis if required to monitor risk within the portfolio.

James Neill, Middle-Office Product Manager EMEA, Global Transaction Services, Citi, says the VaR analytics service uses market-leading software. ‘A key advantage is that it offers full coverage of all assets — including derivatives,’

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he says. ‘The tool is extremely flexible. Using customised parameters, clients can use the Value at Risk (VaR) analytics for their own stress testing. They can also complement this analysis by using our compliance tool to flag up any breaches in investment or counterparty limits.’

Getting a Top-Level Picture

A concerted attack on risk needs to be multi-layered — and with substantial support at the fiduciary level. ‘The director of a fund may not have the expertise to deal with every area of risk, so it is vital that the trustee or depotbank partner is able to bring together all the information on a timely basis in an intelligible form,’ says Mr Quinn.

It is also important that a provider of fiduciary services can deliver the information within the context of the fund domicile, so that international directors get the local regulatory perspective. Citi’s Global Transaction Services’ experience in managing risk and controls across more than 50 centres around the world on behalf of clients based in multiple domiciles — all supported by continuous tracking of the changing regulatory environment — gives it a good understanding of the issues that investment management boards face.

Dealing with Counterparty Risk

In the hedge fund world, many investment managers have responded to last year’s events by diversifying the number of prime brokers they use in order to spread risk. Citi’s ability to offer both prime broking and custody — and its development of ‘Prime Custody’ spanning both services, allowing unencumbered assets to be held by the custody arm and delivering combined reporting for all the assets — allows firms to gain all the benefits of a single provider while minimising risk.

Mr Quinn stresses the benefits of a single provider delivering administration, custody and related services in reducing risk: ‘Where there are multiple providers, they all have to deal with one another. With a single provider, there is one set of systems and one point of contact. It is a lot easier to manage.’ There is one other big advantage: ‘Where Citi provides everything from custody, securities lending, fund administration and fiduciary services, through to compliance monitoring and prime brokerage, we can internalise most of the controls, he says, ‘With benefits for the clients in terms of reduced complexity and therefore reduced operational risks.’

A good custodian should be able to provide crucial management information on counterparties to help clients reduce risk in this area. ‘In emerging markets, or Over-the-Counter (OTC) markets where there is no central counterparty, fail trade analysis and the ability to look at the custodial performance of other providers can identify areas where there could be exposure for Citi or the client,’ he says. Citi’s local custody network in emerging markets allows for more control in the release of cash, says Mr Quinn.

A solid approach on the part of a custodian should prevent client assets from disappearing in the event of a broker default. In the Lehman collapse, all exposure on

the part of Citi’s fiduciary clients was collateralised, according to Mr Quinn. That was the key to preventing losses. And with a local presence in all the key markets, Citi was able to talk directly to Lehman’s local agents and counterparties. ‘That was a big advantage,’ he concludes.

In the exchange-traded derivatives arena, many firms are now using futures clearers as a means of spreading margin deposits around and diluting counterparty risk. In

both exchange-traded and OTC derivatives, timely information and reporting on settlements, valuations and counterparty exposures are crucial to good risk management. Citi’s front-to-back OTC derivative trade processing and valuation service is fully automated to

meet the most demanding daily reporting schedules.

Liquidity Management

Despite the recent improvement in sentiment in the money markets, the management of cash — either within a fund or directly on behalf of clients — remains an important issue for investment managers. The proposed new European directive will require investment managers to put in place a transparent liquidity management system, stressing that liquidity must be considered a primary issue by managers.

Control and visibility are the keys to minimising the risks inherent in the management of surplus cash.

The message is clear: investment managers need to apply a step-bystep approach to risk management that recognises the diversity of areas in which risk is trapped.

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Increasingly, investment managers are looking for safety through diversity by spreading cash around a range of counterparties — and that is prompting many to turn to investment portals that provide a single access channel to the money markets. Citi’s Online Investment (OLI) portal, covering 21 countries and 18 currencies, offers a wide range of instruments, from instant access and time deposits to more than 30 AAA-rated money-market funds.

Wealth managers, and investment managers running segregated accounts, face a particular challenge: to account clearly for the cash they hold on behalf of multiple clients. ‘Around USD2 billion of cash is held by intermediaries within the Eurozone,’ says Roger Brookes, Director, Financial Institutions Cash Sales EMEA, Global Transaction Services, Citi. ‘Many are faced with having to open thousands of separate accounts and then struggle with internal systems that do not integrate with bank systems,’ he says. ‘There are lots of potential points of failure and major issues of control and compliance.’

The issue has lately become more pressing — for two reasons. First, wealth managers concerned with counterparty exposure want to maximise available deposit protection on behalf of each client. That requires strong customer-level accounting. Second, the UK’s Financial Services Authority is working on new standards for accounting for customer-level holdings that, it is estimated, could cost UK firms GBP1 billion or so to implement.

Citi’s response has been to develop a virtual accounting platform that delivers clear, segregated and fully audited client-level accounting through a single bank account. It will provide robust and cost-effective

control of client cash and calculate the maximum amount per client sub-account that will qualify for deposit insurance with any one bank, allowing firms to demonstrate that they have managed their clients’ money effectively. Money can then be switched quickly in an automated environment.

Step-By-Step Approach

The message is clear: investment managers need to apply a step-by-step approach to risk management that recognises the diversity of areas in which risk is trapped. From the investment process to operations, from compliance to cash management, every element of the business has a contributory role to play in mastering risk. And, crucially, the monitoring and reporting process needs to be coordinated centrally and supported by strong fiduciary input.

In all these areas, Citi has targeted product offerings that build on its skills and expertise as a leading fund administrator in both the traditional and alternative investment management sectors. The offerings also draw on Citi’s wider strengths in global custody and trade processing, fiduciary, middle-office services and liquidity management. As the external pressures for better risk management mount, Citi is ideally placed to help investment management firms respond by instilling best practice in every area of their business.

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Demand has certainly not gone away. The conclusion is that things look a lot rosier around the corner.

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After the traumas of late last year, there are important lessons to be learned for securities lenders. But demand has not gone away and the outlook remains positive.

The securities lending industry had everything thrown at it in 2008. While the collapse of Lehman Brothers critically undermined lenders’ confidence in market counterparties, the drying-up of liquidity in areas such as the asset-backed securities market raised the threat of major losses on the reinvestment of collateral. Meanwhile, the move by many borrowers to reduce the size of their balance sheets and a sharp contraction in the hedge-fund industry reduced demand for borrowing.

For all that, activity held up well, demonstrating clearly that securities lending plays a key role in the smooth functioning of capital markets — and is likely to continue doing so.

International securities lending has grown rapidly in the past 20 years. It has been driven by the expansion of hedge funds, broker–dealers and custodian banks as well as the growth of the international derivatives markets; and the introduction of book-entry settlement systems (which have resulted in greater processing volumes). Technological advances such as the much-enhanced computer processing power, access to

real-time price information and automated trade execution have also played their part — as has the removal of tax, regulatory and other barriers to stock lending around the world.

Lendable assets have mushroomed. The Risk Management Association has tracked market volumes since the first quarter of 1999, when

Back to Basicsin Securities Lending

4,000,000.00

Market Volumes

Total Balance (Group) Lendable (Group)

Source: Data Explorers

Len

dab

le (M)

Tota

l Bal

ance

(M

)

20,000,000.00

3,000,000.00 15,000,000.00

2,000,000.00 10,000,000.00

1,000,000.00

0.00July 07 July 08January 08 January 09

5,000,000.00

0.00

19

it calculated lendable assets at USD2.3 trillion. At their peak in the second quarter of last year, they were approaching USD13 trillion with Data Explorers putting this at USD15.1 trillion for August 2007. Then came the contraction.

Between January 2008 and early March 2009, the gross inventory value in the world’s top 50 shares tracked by Data Explorers’ DESLI Global 50 index fell by a half. Much of that decline was down to the sharp fall in share prices over the period. But, says Jules Pittam, the firm’s Managing Director, lenders also pulled around 15 per cent of worldwide inventory out of the market late last year and early this.

‘There were two reasons for this,’ he says. ‘First, many lenders did not understand the risks involved. A lot of people have subsequently demanded more or higher-rated collateral or changed their guidelines on reinvestment.’

The other key reason was concern at the impact of short selling. ‘Irrespective of how many academic treatises demonstrate that short selling has no impact on share prices, investors with a large proportion of the lendable amount in a given stock are going to ask themselves whether they should be lending,’ he says: ‘Now, with more transparency around short selling, lenders can at least make more informed decisions — and that can only be a good thing.’

Lending rates are still significantly higher than before the Lehman collapse. Says Mr Pittam: ‘The rates at which lending agents lend to broker–dealers have risen about 15 per cent since the Lehman collapse. Agents are demanding higher fees, there is less liquidity and there is greater transparency. But the rates at which broker-dealers are lending to their hedge funds clients have more than

doubled. There are some “haves” and “have-nots” out there.’

The area most affected by the downturn in activity is general collateral lending. This is high-volume low-margin lending in which brokers typically borrow a bundled range of different securities, all meeting minimum credit criteria, to collateralise other trades such as swaps. Brian Staunton, Head of Securities Lending EMEA, Global Transaction Services, Citi says: ‘General collateral lending has dropped dramatically because many brokers do not want to commit risk capital to this activity and because there is a lack of clarity surrounding the suitable reinvestment of cash collateral.’

So what does the future hold for the securities lending market?

There are some signs of recovery. The volume of lendable assets has begun to pick up again, says Mr Pittam. The volume of loans has also recovered since hitting a low at the start of the year. ‘Many of the lenders that suspended lending last year have returned,’ says Mr Staunton. ‘Indeed our experience is that the vast majority are now back.’

Understanding Risk is Key

There is, however, a new appreciation of risk on the part of lenders. ‘The market is going back to basics,’ says Mr Staunton: ‘That means picking good quality counterparties and only accepting collateral that fits the lender’s risk profile.’ Mostly, that means government bonds, which can be liquidated quickly. Far fewer deals are being done for cash collateral and there is less cash reinvestment taking place. Lenders can still accept cash as collateral and participate in a cash re-investment

programme that fully meets all of their credit and risk requirements.

In the past, a lot of lending has been driven by cash reinvestment strategies. ‘At Citi we believe collateral should be viewed first and foremost as a precious commodity,’ says Mr Staunton. ‘Clients should remember why they are lending. There should be an intrinsic value to the loan. That is not to say lenders should decline the opportunity to engage in general collateral lending, but they should only do so if there is a fee or the prospect of a reasonable yield on their reinvestments.’

Vigilant collateral management, involving daily mark-to-market, is a top priority in the post-Lehman world. Haircuts and margin requirements must be continuously evaluated to ensure lending is as robust and bullet-proof as possible. The much-increased volatility witnessed in the markets over the past year has also reinforced the importance of accurate portfolio valuations.

As never before, says Mr Staunton, lenders should understand the risks associated with the programme they undertake: ‘They should research collateral types and amounts, reinvestment guidelines, counterparty restrictions and any collateral indemnification provided by the lending agent. The responsibility works both ways. Agents have to help lenders fully comprehend all aspects of the programme while lenders should likewise appreciate their accountability as principals in the lending process to understand the particulars of the programme.’

Looking Forward a Year

One big factor will continue to affect the lending market for some time to come. A number of big lenders are sustaining their lending for one reason only: they

20

are reluctant to close out holdings in asset-backed securities they purchased for their collateral reinvestment pool before the worst of the credit crunch eliminated liquidity in much of the asset-backed securities market. If they stop lending now, they will have to take big losses on the securities.

‘Much of that paper will mature at par by the middle of next year,’ says Data Explorers’ Jules Pittam. ‘As the paper rolls off, the pressure on those institutions to maintain lending at all costs will ease and fees will rise. Demand has certainly not gone away. The conclusion is that things look a lot rosier around the corner.’

Certainly the case for securities lending remains as firm as ever. The bottom-line benefits of lending that attracted participants to the marketplace still exist. ‘We believe the opportunities in the core business for lenders to achieve positive performance, consistent with their objectives and risk tolerance levels, remain sound,’ says Mr Staunton.

It is also clear that the liquidity provided to the world’s capital markets by securities lending will continue to play an important role in their smooth functioning. ‘At the peak, around USD3.9 trillion in securities were on loan as of May 2008,’ ends Mr Staunton. ‘Without this liquidity, markets would simply not behave in the same way. There would be significant distortions in asset pricing as liquidity dries up and settlement systems become less efficient. Securities lending is firmly embedded in the capital markets and I remain very optimistic about its future.’

The debate over the impact of short selling — which provides much of the demand for stock borrowing — remains a lively one. The ban on the short-selling of financial stocks, introduced in a number of markets last autumn, failed to stem the downward pressure on banks’ share prices but had a major impact on market volatility. Those are the key conclusions of a study produced by the French business school, EDHEC.

Its author, Professor Abraham Lioui, says that the period covered by the short-selling ban in the US was clearly distinct in nature. ‘It was marked by an increase in volatility across the board,’ he says. ‘That led to an increase in idiosyncratic risk for the short-ban stocks. In other words, these stocks moved still further from their fundamental value. Above all, no reduction in negative skewness of returns was observed.’

The study shows there was no reduction in downward pressure on the market. ‘Negative expectations were not changed,’ he says. ‘In addition, there was a spillover to the rest of the market with the range of daily movements increasing during the period.’

One of the key findings of the report is that the market as a whole reacted negatively to the short-selling ban. ‘There is a major lesson here,’ says Professor Lioui. ‘The regulators’ mission is to guarantee the fairness of trades. The ban was seen as a deviation from that mission and it was done without adequate explanation.

‘The market needs consistency. In 2007 and 2008, all restrictions on short selling were removed. Then, suddenly, the regulators said the short sellers were manipulating prices. If regulators consider it part of their job to intervene to change prices they need to tell the market.’

Short-Sell Ban Misses Target, says EDHEC report

20 21

Redefining the Custody Landscape

Global custody is moving on. Today a good custodian is a provider of

investor services solutions, not just a securities processor, employing a modular approach that

can be tailored to any client challenge at any stage in the securities lifecycle.

22

In a recent research report on the securities processing industry, Booz & Company, the management consultants, highlighted the key role securities processors are playing in helping investment managers keep a lid on costs and handle a spectrum of non-core services in the current difficult climate. That said, Booz meant securities processors should not be retrenching during the crisis. The report concludes: ‘Instead, they should be improving their offerings in three ways — re-engineering processes, automating services and optimising the use of the global facilities.’ They should also

be enhancing their offerings in the middle-office, the report concluded.

For Citi, the Booz report is, in many respects, old news. Citi’s global custody offering already features end-to-end automation based on a single global platform, which is now supported by a network of more than a dozen regional centres of excellence where everything from trade processing to pricing can ‘follow-the-sun’ to deliver the most timely results for clients. Citi has also anticipated the Booz advice on enhancing middle-office services and continues to develop new initiatives here.

The ability to deliver added value at different parts of the trade cycle is the key element of the solution mix.

23

Adding Value

Vital as it is, a processing powerhouse is only part of the story. ‘We believe the role of a custodian has shifted from traditional safe-keeping and settlement to more of a risk management and cost-containment function,’ says Nick Titmuss, Head of Global Custody EMEA, Global Transaction Services, Citi. ‘It is about reducing the total cost of ownership for a client through the entire investment lifecycle. At Citi, we have a fully integrated execution-to-custody approach. It allows us to deliver direct access to markets at one end of the chain and remove cost and improve transparency at the other. We call it enhanced custody — and it is about delivering tailored solutions that can draw on one or more of our capabilities at any point in the securities value chain.’

The two key targets are in helping clients manage risk and improve cost efficiency. In the traditional area there has been a number of

new services introduced to the industry. In the hedge fund market, there have been demands for more transparency in the wake of the Stanford and Madoff affairs. Citi has used the leverage of its twin roles as prime broker and custodian to develop a hybrid service called Prime Custody. This allows a hedge fund’s unencumbered assets to be held by the custody arm while delivering combined reporting for all the assets — including those held at the prime brokerage.

The same driver has increased the number of asset classes Citi is being asked both to process and to safekeep. ‘With our continued investment, we have expanded our middle-office trade operations to deliver a complete solution in both exchange-traded and Over-the-Counter (OTC) products,’ says Nick Burr, Investment Administration Product Head EMEA, Global Transaction Services, Citi. ‘Using the data flow, we can deliver a full risk management and analytics service to help clients manage and monitor their exposures.’

Separately, Citi has built a comprehensive custody and cash-analytics solution that consolidates reporting for daily portfolio accounting, compliance, risk and performance — all on one integrated platform. Treasury Analytics, part of CitiDirect® for Securities, fully integrates a client’s portfolio management, trading, operations and reporting functions to facilitate timely decision-making, irrespective of where the assets are held.

End-to-End

The ability to deliver added value at different parts of the trade cycle — irrespective of whether or not the investment manager is a Citi custody client — is the key element of the solution mix.

Foreign-exchange execution is a case in point. Clients that manage

Citi is fast redefining what custody means.

Enhanced custody reaches into every

operational area, including front-office

execution, in an integrated manner.

25 24

large numbers of segregated accounts often have to deal with multiple custodians. Citi can capture trade data from the middle-office and, through its AutoFX service, give clients the benefit of its renowned pricing power in foreign exchange to deliver better execution.

In the drive for cost efficiencies, Citi can often deliver major savings on the back of scale economies that only a global provider can achieve. Take the middle-office. ‘With a single, global technology set, we are able to leverage our regional centres of excellence to deliver major efficiency savings. We offer same-day confirmation and have been achieving Straight-Through Processing (STP) rates in excess of 95 per cent,’ says Mr Burr. Citi offers a complete range of middle-office outsourcing services, including a fully automated service for full, front-to-back OTC derivatives trade processing and valuation.

‘New centres of excellence are constantly evolving to cater for different asset classes,’ says Mr Burr. ‘These provide pools of expertise into which we can plug. We can service clients more holistically in a consistent, 24/7 service environment while still communicating with them locally.’

Offering Full Execution-to-Custody

Nowhere is the end-to-end integration of services more apparent than in Citi’s Execution-to-Custody (E2C) service that was launched in 2008. It is a single integrated solution that draws on both Citi’s capital-markets and securities-processing capabilities to deliver an end-to-end trading, settlement and custody service spanning all major execution venues. Clients can trade through either Citi Global Markets or a third-party broker.

‘It delivers enormous efficiencies for clients,’ says Mr Titmuss. ‘E2C was originally launched with small- or medium-sized broker-dealers in mind. They can use it either to access markets where direct access is uneconomic or take a bundled service for all markets. But increasingly bigger institutions are using E2C, prompted by the best execution rules introduced with the Markets in Financial Instruments Directive (MiFID). E2C saves them having to shop around for the best price,’ he says. E2C remains the only service of its kind supported by a comprehensive custody service.

Taking the Modular Approach

Throughout its span of custody and related services, Citi’s approach is modular — a requirement that is all the more important for investment managers according to the, Citi sponsored, CREATE-Research report (see page 2).

To prepare their businesses for the future, investment managers are turning to providers who can provide the blend of customised and ‘off-the-peg’ solutions consistently across multiple markets. Through Citi’s leading network and platform, clients can access local execution and services while still enjoying a global and consistent view of their account — with a single point of access and consolidated reporting.

With a continuing flow of new products and services, and a commitment to ongoing investment, Citi is fast redefining what custody means. Old-fashioned, back-office definitions are a thing of the past. Enhanced custody reaches into every operational area, including front-office execution, in an integrated manner. It is as much about accessing trading platforms and market

infrastructures in a fully automated process as is it about post-trade asset servicing and safekeeping. Securities processing has evolved into investor servicing.

25

With mounting wealth and a deepening equity culture, the Middle East was viewed as a major

growth area for investment managers. Then came last year’s brutal shake-out. What are the

prospects for asset gatherers now? And is the long-term growth story still intact?

Middle East Markets on Recovery Path

26 27

The Gulf Cooperation Council (GCC) region poses something of a conundrum right now. On the one hand, predictions of a mass exodus on the part of foreign workers and professionals over the summer suggest economies such as Dubai’s, with its hard-hit property and banking markets, have yet to touch bottom. On the other, the recent strong rally in the oil price has been a shot in the arm for local stock markets, many of which are now showing gains on the year, and most parts of the region are still set to turn in GDP growth for the year.

Whatever the short term holds, the long-term growth story remains intact, most observers agree. ‘On the macro-economic front,’ says Habib Oueijan, Managing Director of Majid Al Futtaim Asset Management (MATAM), ‘the Middle East North Africa (MENA) region accounts for 51 per cent of global oil reserves and 30 per cent of

global gas reserves. Between 2000 and 2007, the GCC generated USD2.5 trillion in oil and gas revenues. That money has to go somewhere.’

The key to the future, he says, is demographics: ‘There are 160 million people in the region of whom more than 53 per cent are under 30 years of age. So there is real demand for investment in infrastructure, housing, schools, hospitals, highways and so on. Saudi Arabia has 25 million people and has not been spending like Dubai in the past. Now it is spending out of need, not out of luxury.’

Richard Street, Head of Securities and Fund Services for the Middle East at Citi’s Global Transaction Services, who is based in Dubai, says modernisation and diversification away from dependency on oil are two themes that bode well for the future:

‘Abu Dhabi is still working hard at getting its Formula One racing circuit up and running. Qatar has big modernisation plans. There has been some slowdown in infrastructure projects but Saudi Arabia recently earmarked USD400 billion for infrastructure spending over five years. That includes four new economic cities.’

For all the doom and gloom, many firms are still adding to local headcount, he says. ‘Consultants and lawyers continue to come to the region. Insurers have also been increasing their numbers here. Citi itself is still augmenting its local analyst teams on the back of demand for the broking side.’

Citi’s Global Transaction Services business also sees the present as a good time to invest, he stresses: ‘We opened a direct custody and clearing operation in Dubai earlier this year — covering all three UAE

26 27

As confidence returns to the

region and the wider industry, investment

managers must formulate their long

term strategy in conjunction with a stable, in region

provider.

28 29

markets — and are due to open another in Kuwait shortly. It is likely that Bahrain and Qatar will be added next year.’

Citi’s custody operations complement a wide range of issuer, investor and intermediary services in the GCC, including in-region fund administration and distribution servicing. Mr Street says that although a number of fund launches and IPOs were pulled earlier this year, there is still a lot of activity.

The big question is when investor confidence — shaken by two big corrections in the space of three years — will return in force. GCC markets enjoyed a strong bull run over the first half of the decade as money was repatriated to the region in the wake of the US response to the September 11 attacks, and then as major spending programmes by governments and property firms encouraged first-time investors into what were still small markets. The bubble was first pricked in late 2005, leading to a 40 per cent pullback in prices in 2006.

In 2008, however, the MSCI Arabia index fell 55 per cent, with the Dubai market suffering worse still — registering a 72 per cent fall. The extent of the falls is partly explained by wholesale selling by foreign investors who had piled into local markets in the hope of currency revaluations that failed to materialise. The panic was visible in the pricing of local government debt by international investors. In February 2009, the credit default

swaps for Dubai’s debt crossed the 1,000 basis points level — rating the emirate on a par with Iceland. Traditional bonds and Sukuks alike traded at big discounts throughout the region.

‘Historically, the GCC markets have demonstrated low correlation with international markets,’ says Mr Oueijan. ‘From mid 2005 until mid 2008, correlation was no higher than 0.1. But, there has been a dramatic shift over the last 12 months, with correlation rising to 0.8 or 0.9. There was no decoupling. Now, in a high correlation world, people are expecting the pick-up in the US and European markets to flow through to the MENA markets — and that is what has happened since March 2009.’

There are signs that confidence is returning among local investors. Much of the recent rally has been regionally driven and trader-led. Majid Al Futtaim Asset Management has just launched the Elite MENA Equity Fund, seeded with USD150 million of Majid Al Futtaim family money. ‘A lot of interest is being shown by international investors,’ says Mr Oueijan, ‘But whether that will translate into real investment money remains to be seen.’

‘In my opinion from a longer-term standpoint’, continues Mr Oueijan, ‘The markets present a good opportunity’. He points to attractive valuations in many areas, low currency risk for dollar-based investors and increasing

liberalisation combined with tighter regulation. The fact that the Saudi authorities are beginning to allow foreign participation in their market is also a good sign. ‘Such events will encourage governments in the region to bring in best practice,’ he says.

Mixed though the short—term outlook may be, as confidence returns to the region and the wider industry, investment managers must formulate their long term strategy in conjunction with a stable, in region provider who can provide consistent service standards locally and throughout the rest of the world. Providers such as Citi whose direct local market and product experts, supported by an unrivalled global network of securities services operations cannot be underestimated as the partner of choice.

Over the long-term the GCC continues to offer outstanding opportunities to international investment managers, for whom a regional marketing presence should remain a key element of any global strategy. The strong base of high-net-worth individuals, sovereign wealth funds and institutional money, combined with a burgeoning middle class and strong demographics, all point in the long-term direction. Moreover, with a fast-recovering oil market, many of the short-term inhibitors to growth may be evaporating with clear and present opportunities emerging.

28 29

Technology Global Awards 2008• Custody and Securities Services Award

Technology Awards 2008• Best Custody and Security Services

Awards of Excellence 2008• Best Cash Management House Globally

Cash Management Poll 2008• Best Cash Management Bank Globally: Financial Institutions

HFMWeek Hedge Fund Administration Survey 2008• #3 in Top 10 Administrators by Single Fund AUM

Global Custody Survey 2008• #3 Global Castodian • Top Rated in AsiaMutual Fund Administration Survey 2008• #1 in Asia• #1 for Funds Between US$1–5 billion AUM• Top Rated in Equity• Top Rated in Fixed Income• Top Rated in Other Funds

Securities Lending Survey 2008• #2 Rated for Clients with Less than US$1 billion AUM• #3 Rated Multi-Provider

Hedge Fund Administration Survey 2008• Top Rated for Simple Strategy• Top Rated for AUM up to US$100 million• Top Rated for East Coast Location

Prime Brokerage Survey 2008• Top Rated Global Provider• Top Rated for Clients with Assets Between US$1–5 billion• Top Rated for Clients with Assets Between US$5–10 billion• Top Rated for Clients with Assets Over US$10 billion• Top Rated by Multi-strategy Clients• Top Rated by Multi-PB Clients

Best Treasury and Cash Management Banks and Providers Awards 2008• Best Overall Cash Management: Global, Latin America • Best Bank for Liquidity Management: Asia, Middle East

and Latin America • Best Bank for Risk Management: Africa, Latin America,

North America

World’s Best Internet Bank Awards 2008

• Best Overall Internet Bank• Best Corporate/Institutional Internet Bank: Global, North America,

Latin America, Central and Eastern Europe and 68 countries• Best Online Cash Management Site: Global, Asia, Central

and Eastern Europe, Europe, Latin America, Middle East and Africa, North America

• Best Investment Management Services: Global, Latin America, Europe, North America

• Best Information Security Initiatives: Latin America, North America

Best Investment Bank Awards 2008• Best Global Investment Bank

Global Custody Survey 2008• #1 Global Custodian (weighted) • #1 Global Footprint • #1 by Mutual Fund Managers (weighted) • #1 by Mutual Fund Managers — Americas (weighted) • #2 by The GI 100 (weighted)* • #2 Americas (weighted) • #2 Asia (weighted) • #2 Sole Custodian EMEA (weighted) • #3 EMEA (weighted)

Global Awards 2009• Global Mutual Fund Administrator of the Year • Global Mutual Fund Administrator of the Year: Asia Pacific European Awards 2008• Securities Services Provider of the Year• Regional Sub-custodian of the Year: South European region

Global Custody Survey 2008• #2 Cross-border Custody Offering

Industry Recognition

30 31

Jervis SmithManaging Director Global Head of Client Executive Global Transaction Services, CitiTel: +44 (0)20 7986 3132Email: jervis.smith@citi.com

Richard ErnestiManaging DirectorGlobal Head of Client and Sales Management for InvestorsGlobal Transaction Services, CitiTel: +44 (0)20 7500 5043Email: richard.mf.ernesti@citi.com

Contacts

This publication is produced by Citi’s Global Transaction Services business.

We welcome your feedback and suggestions for future articles.

EditorsNadine TeychenneEmail: nadine.teychenne@citi.com

Gene PetersonEmail: gene.peterson@citi.com

Global Transaction Services www.transactionservices.citi.com

© 2009 Citibank, N.A. All rights reserved. CITI and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates, used and registered throughout the world. The information contained in these pages is not intended as legal or tax advice and we advise our readers to contact their own advisers. Not all products and services are available in all geographic areas. Any unauthorised use, duplication or disclosure is prohibited by law and may result in prosecution. Citibank, N.A. is incorporated with limited liability under the National Bank Act of the U.S.A. and has its head office at 399 Park Avenue, New York, NY 10043, U.S.A. Citibank, N.A. London branch is registered in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, under No. BR001018, and is authorised and regulated by the Financial Services Authority. VAT No. GB 429 6256 29. Ultimately owned by Citi Inc., New York, U.S.A.

GRA20125 06/09

30 31

To more effectively manage your firm’s business in quickly evolving markets requires uncommon

insight and on-the-ground expertise.

At Citi, we’ll partner with you to design solutions that deliver efficiencies, transparency and help

mitigate risk — whether you’re entering new markets, launching new strategies or introducing

new instruments. And our modular approach, robust operational support and unmatched global

presence provide you with a rare combination of flexibility and scale.

That’s why firms worldwide partner with Citi. And that’s why Citi never sleeps.

Please visit us at www.transactionservices.citi.com or contact Richard Ernesti at

+44 (0) 207 500 5043 or richard.mf.ernesti@citi.com.

© 2009 Citigroup Inc. All rights reserved. Citi and Arc Design is a trademark and service mark of Citigroup Inc., used and registered throughout the world. Citi Never Sleeps is a service mark of Citigroup Inc.

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