Something surprising has happened since the Swiss National Bank removed its 1.2000 EURCHF exchange floor and set the Swiss franc and the FX industry into a tailspin; it’s been business as usual. This has occurred despite prime brokers like CitiFX, Bank of America and others cutting or limiting credit relationships, as well as a number of hedge funds and brokers closing down due to Swiss franc related losses. Nonetheless, the industry has been humming along thanks to increased FX volatility, which has kept volumes, and more importantly, broker and bank revenues healthy.
In this regard, one of the more anticipated earnings releases, which resembled more of a snoozer was Citigroup’s quarterly financials that were reported last week. The global consumer and corporate bank, has become one of the largest FX players in the world. Leveraging its corporate banking presence throughout the world, Citigroup has been able to build a diverse multi-currency balance sheet which allows it to be a primary FX market maker for both major and emerging currencies. The result is that the bank’s FX operations have grown to where it is one of world’s largest currency dealers by volumes, as well as a primary prime broker to the FX industry.
Residing at the heart of the industry though, also exposed it to the post Swiss franc related turmoil. Among effects of the SNB’s decision, Citi has divulged that it had taken over a $100 million trading loss from the franc. In addition, the firm verified to Finance Magnates that its FX prime brokerage unit was reviewing its operations which has led to account closures. Also, the firm’s smaller CitiFX Pro retail forex trading unit has been reported to be on the block, with an impending sale expected soon.
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A strong quarter for rates and currencies: John Gerspach
Despite the firm’s involvement in the FX space, during the bank’s earnings report and subsequent conference call, currency performance was related in a positive light. When asked about a year over year decline in overall FIC (Fixed Income and Currencies) trading revenues, Citigroup CFO, John Gerspach related that the weakness had more to do with Q1 2015 being “a down quarter for spread products”. However, he stated that excluding what was being called by the firm as “a modest loss stemming from the Swiss franc”, currency and interest rate trading revenues had risen 20% from the previous period last year, with Gerspach calling it “a strong quarter for rates and currencies”.
Overall, during the quarter, FIC revenues were lower by 11% to $3.5 billion compared to Q1 2014. Even when including Swiss franc related losses, Citigroup noted that interest rates and currency products showed growth. In regards to this, Gerspach mentioned that currency trading was “driven in part by central bank actions and a pickup in FX volatility”, with strong client flows to both G10 and local market currencies.
The conclusion one can take from Citigroup’s report, is one that was a theme for the first half of 2013 and last quarter of 2014: volatility in the market can mask the warts of even the most distressed FX firms.