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Sfsnews111 Jan2016.Pdf Markets and Securities Services January 2016 | Issue 111 Welcome Gareth Mitchell Global Head of Trading for Agency Securities Lending As David Martocci highlighted in the December edition (110) of Market Monitor, 2015 was a remarkable year for Citi’s Agency Securities Lending business, one in which we continued to deliver excellent results for our clients while expanding our lendable asset base. Things do not happen in isolation. We have for many years heavily invested in our technology capabilities, in the global footprint of markets we lend in on your behalf, and in the expertise of our people. For our industry, our clients and the borrower community, 2016 looks like it will be a transformational year. There are substantial headwinds to flow activity, which, at the time of writing, are stronger than in previous years. This, in turn, has an impact on the “traditional” revenue streams accessed by lenders and clients. An ever-changing regulatory landscape continues to shape how trades are structured for agent lender and borrower alike ─ with whom, what collateral choice, which tenor, what margin, to clear or not, etc. Citi runs a tailored lending program, individually tailored to each of our client’s requirements and risk profile. In a market where there are no “one-size-fits-all” trade structures, bespoke is a differentiator. The fact is, innovation is the cornerstone of what we do. It is only by continually reevaluating the market, adapting and innovating that we at Citi can deliver consistent results for our clients, as well as bringing different revenue streams to market. In TAO (Trading, Analytics and Optimization), we have a market-leading platform to complement our global trading talent. TAO is agile technology. It has constant global trading desk feedback combined with a rapid speed of deployment allowing Citi to extract greater value for clients. In late 2015, we launched our pay-to-hold capabilities and are now looking to further adapt this for HQLA (high-quality liquid assets) trades. This innovation offers brokers on- demand liquidity, while attracting a premium for clients who can offer it as part of their fixed-income lending programs. Around the globe, we also continue to pioneer lending in new markets, with India slated for this year and a number of markets in emerging Asia and Latin America being actively investigated. New markets bring the opportunity to deliver additional revenues to our clients, differentiate Citi against our peers and allow us to be the go-to agent lender of choice for borrowers. Within the cash reinvestment space, our DAIS (Directed Agent Investment Service) product goes from strength to strength, being able to offer Citi’s corporate clients, buy-side clients and central clearing counterparties access to a range of investment and liquidity transformation opportunities. “What, then, is the true Gospel of consistency? Change. Who is the really consistent man? The man who changes” (Mark Twain). Citi has shown throughout its history the ability to be flexible and adaptable in times of change. Hence, it is with confidence that we look forward to 2016 and continue to deliver for our clients while investing in our infrastructure for the future. January 2016 | Market Monitor 2 US equities As December came to an end, all the the fact that approximately half of US Active stocks for the month included: major equity benchmarks ended 2015 households use natural gas to heat with a loss, with the exception of the their homes.4 • LINE (Linn Energy LLC) NASDAQ Composite, which finished up • TDW (Tidewater Inc.) 5.73% for the year.1 Additionally, the tumult in oil prices this year has pulled down the value of oil • ZOES (Zoes Kitchen Inc.) Meanwhile, the Dow Jones Industrial company shares and the performance • CHK (Chesapeake Energy Corp) Average finished down 2.23%, the of the overall stock market.5 • PLUG (Plug Power Inc) S&P 500 down 0.73%, and the Russell 2000 down 5.48% for the year.2 One positive from all of this is that all • RIG (Transocean Inc) this pain for energy companies is good • CLF (Cliffs Natural Resources) Seven of the ten biggest losers in the for consumers, who are now enjoying S&P 500 were energy companies this low prices for gasoline and shrinking • FIT (FitBit Inc) year, particularly those dependent heating bills.6 The long-awaited rise • UNIS (Unilife Corp) on the price of natural gas one of the in the Fed’s interest rate finally came • CNX (Consol Energy Inc) biggest stories of 2015.3 and then went during the month of December, as the market seemed to • MNKD (Mannkind Corp) Mother Nature has contributed to take the move in stride with relative these losses as an extraordinarily ease. A big question is how many warm fall has led to the US slashing interest-rate hikes we can expect see demand for heating. This is in spite of in the next 12 months. Stay tuned. US corporate bonds There is not a lot to note here as the Of note, although not surprising, New Issues for December included: corporate bond market was a quiet there was not a single issuance of one in December, with a limited story investment-grade corporate bonds • Bank of Nova Scotia Inc to tell. for the final three weeks of the month (064159HB5) from 18 through to 31 December, as the • Chesapeake Energy Corp A grand total of USD57.1 billion of market awaited the interest-rate hike (165167CQ8) investment-grade corporate bonds by the Fed and the upcoming holidays.8 were issued in the primary market during December, which is a fall of We’ll keep an eye on the coming 46.9% from the previous month and months to see what direction the the number of new issuers fell from corporate bond market heads. 93 in November to 55 in December.7 1 See https://www3.troweprice.com/usis/content/iinvestor/en/planning-and-research/t-rowe-price-insights/markets/weekly-market-wrap-ups.html, last accessed on 5 January 2016. 2 See www.troweprice.com. 3 See http://www.nbcnews.com/storyline/2015-year-in-review/after-wild-ride-stock-markets-end-year-almost-where-they-n488696, last accessed on 5 January 2016. 4 See www.nbcnews.com. 5 See www.nbcnews.com. 6 See www.nbcnews.com. 7 See http://marketrealist.com/2016/01/no-investment-grade-corporate-bond-issuance-3-weeks-december/, last accessed on 5 January 2016. 8 See www.marketrealist.com. January 2016 | Market Monitor 3 US cash and money markets1 The highly anticipated and televised The Federal Reserve has illustrated was an indication of the high levels Federal Open Market Committee a propensity to act as a backstop to of cash in the market and the limited (FOMC) hike of the Fed Funds target overnight dealer supply over quarter- number of investment alternatives. range of between 0.25 and 0.50 bps ends and dramatically increased the was in line with street expectations. size of the RRP (Reverse Repurchase As money market fund reform Program) program in conjunction continues to pressure the short end The accompanying dovish tone of the with the rate hike. The program was of the curve, perhaps the Fed can FOMC statement allayed any fears increased to 2 trillion, which appears provide some relief as its provides of a rapid movement in rates and to have alleviated market pressure, as a higher-yielding investment emphasized a gradual pace with an dealers contracted balance sheets on alternative through the RRP. intense focus on economic data to year-end. However, with an approximate USD26 dictate the trajectory of monetary billion reduction in bills for the first policy going forward. For 12/31, the Fed’s ON RRP had a two weeks of the New Year, the yield record USD475 billion in usage, which increases may be limited. US Treasury and agency2 There were a lot of moving parts in the trading near GC levels. But very soon, went from an average of of between 1 fixed income lending world in December. especially for a 2-year, the issue began and 2 bps in November to as wide as 10 to run, trading in negative territory bps in December, settling mostly in the First, it was a terrific month for specials. before the end of the first week, 5 or 6 bps range. double-digit negatives for the second, Second, in the spread between triple-digit negatives for the third, and The Fed move on 16 December forced deliverable GC (general collateral) and through the fail charge for the forth. levels higher. Pre-Fed, the Opening GCF (general collateral financing), GC Funds rate was in the low teens. Post- had unexpectedly widened. There were several off-the-run issues Fed, Funds were opening in the mid in demand throughout the month, 0.30s, except for year-end, which, Third, there was a Fed tightening. especially towards month- and year- oddly, stood at 0.12%. Pre-Fed, UST And fourth, market participants end, which is not unusual since some GC averaged in the mid-teens and were preparing for the year-end accounts are obligated by regulation to Post-Fed it has been in the mid 0.40s, statement day. have their collateral back in the box for except for year-end, which stood in year-end. When this happens, supply for the mid 0.50s. It’s strange to see the The depth and breadth of specials random specific issues decrease, thus new rate paradigm, especially since had been quite robust throughout creating scarcity value for a potentially funds have been near-zero since 2008.
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