New Execution and Clearing Models

Bring Value and Savings to the Asset

Management Industry
New post-trade processes, designed originally for intermediaries, now offer asset managers the
opportunity to streamline their operations, reduce risk and make major savings.
The investment industry has made huge strides in the
last 30 years. Electronic trading, taking securities trading
to screen-based systems, the development of the global
custody model, regulatory changes these have all
transformed the industry.
Despite much progress, one key problem remains: the
post-trade world has not kept pace with advances in trading
infrastructures and investment practices, which are more
international and more diversified than ever.
There is still significant work to do, and this is no easy
task given the economic environment, the regulators
omnipresence and the scarcity of resources. But, at the same
time, the need to be more efficient gives us the opportunity
to improve internal middle- and back-office processes,
which so far have been low on the priority list. Here lies the
difference the secret of efficiency and competitiveness.
New practices bring value and cost savings
The idea of a client sending an electronic order that is
routed across lit and dark pools, filled, confirmed, allocated
and sent for settlement within a day is a goal for all STP
enthusiasts. The reality is that handling a single order from
end to end is possible at a cost.

Think about a four-jet engine airplane. In normal operation,

each engine is only running at 25% capacity. This is because
the plane will need to continue flying if any of the other three
engines fail. This analogy shows the challenge of building the
right infrastructure and associated support and operating
platform for an end-to-end execution and settlement service.
The platform must handle peaks and troughs without
disruption but it must also be cost-effective.
In our quest for efficiency, we would like to introduce two
new models that allow a reduction in cost, workload and
operational risk.
Broker turnaround trade processing
Many intermediaries use executing brokers to access
foreign markets. By doing so, they save on the connectivity
and membership costs of exchanges and MTFs. How the
intermediary accesses the market and how it processes the
instructions, including the clearing and settlement, has an
impact on the total fee the client whether retail, private
bank or institutional will have to pay.
Today, two models are being used by intermediaries
to ensure the securities purchased get to their clients:
turnaround settlement and third-party settlement.

Below are a series of worked examples that use fictional firms to depict the various models in use by the market.
Turnaround settlement
Take the case of a Spanish broker, called Iberian
Securities. The broker is trading with Citi Global Markets
in the US on behalf of Madrid Pension Managers and
Barcelona Pension Managers. Iberian places an order to
buy 100,000 Microsoft. The shares are purchased by Citi
on the exchange and settle in an account belonging to
Citi (acting as intermediary), which immediately forwards
the securities to Iberians custodian. Then Iberian sends
settlement instructions to its custodian to allocate 50,000
directly with Madrid Pension Managers custodian and
50,000 with Barcelona Pension Managers custodian. Here
the cost of settlement and processing, together with the
management of the positions, sits with Iberian Securities.

Third-party settlement
Iberica Valores
Instruct to BUY
100.000 Microsoft

Citi Global Markets

CONF 100
Microsoft

BUY 100.000
Microsoft

S
 epareate instructions of onward
delivery orders still required.

Citi Global Markets

Consecutive actions

Custodian
Iberica Valores

Deliver 100

C
 ost of onward deliveries on both
sides (market settlement).

Deliver 50

I nstructing onward delivery

settlement and managing processing.

Deliver 50

Turnaround settlement implies:

O
 perational risk and cost of
reconciliation.

Custodian
Barcelona
pension
manager

Initial flow

CONF 100
Microsoft
Custodio CGM

Custodian
Madrid
pension
manager

Deliver 50

S
 implification compared to
Turnaround Settlement.

Deliver 50

Third-party settlement implies:

Instructions to
deliver 50 to
MPM and deliver
50 to BPM

Instructions to
deliver 50 to
MPM and deliver
50 to BPM

Custodio CGM

Turnaround settlement
Iberica Valores

Instructions to
deliver 50 to
MPM and deliver
50 to BPM

Madrid
pension
manager

Barcelona
pension
manager

Initial flow
Consecutive actions

Third-party settlement
Another method of settlement consists in further
streamlining the operational process. In this case, Iberian
places an order to buy 100,000 Microsoft. These are
purchased by Citi on the exchange. Iberian then advises
Citi to settle 50,000 directly with Madrid Pension
Managers custodian and 50,000 with Barcelona Pension
Managers custodian. The broker never settles across
Iberians accounts but with the underlying clients.
This solution reduces the number of settlement instructions
and therefore the operational costs and risks.
Institutions generally pay a premium on their commission
for intermediaries to support third-party settlement as
there is additional work that the executing broker, in this
case Citi, has to perform. There is of course additional
risk. As the recipient of the shares is not the actual
trading counterparty to the original trade, there is
built-in complexity should any settlement errors occur.

Automated third-party settlement

In order to further reduce the costs and the complexity,
a new automated model is being delivered by some
custodians, including Citi. In this model, Iberian will
provide specific instructions in its order placed with Citi
(via a FIX Protocol tag), indicating the onward delivery
details (50,000 to Madrid and 50,000 to Barcelona).
These will be used by the custodian to create settlement
instructions automatically once the order is completed.
This allows the client to use open architecture standards
to advise the custodian of the onward deliveries without
the broker having to pay a premium to the executing
broker or alternatively invest in infrastructure to manage
settlement instruction creation and management.
Not only does Iberian Securities benefit from eradicating
its internal settlement instruction process and
technology, but all the settlement instructions are
sent within seconds of the execution (supporting T+2
settlement), while the static data for commissions,
market fees and standing settlement instructions are
hosted and maintained by the custodian. Iberian also
benefits from the latent scale of the custodians technical
platform, smoothing out the effects of high- and lowvolume processing needs.

The next step will be for the allocation instruction to form

part of the order so that the entire process is automated
and processed continuously.

Automated third-party settlement

Iberica Valores

Streamlining the post-trade process

So far, asset managers have been using a relatively complex
post-trade structure, having little choice and limited options for
improving the efficiency of the process. This is set to change.

Instruct to BUY 100.000 Microsoft with

instruction to onwards deliver of 50 to
MPM and 50 to BPM
Citi Global Markets

CONF 100 Microsoft

Custodio CGM

N
 o need for separate
instructions of onward delivery
orders as they are included in
the initial trade order.

Custodian
Madrid
pension
manager

Deliver 50

S
 implification compared to
turnaround settlement.

Deliver 50

Automated third-party
settlement implies:

Custodian
Barcelona
pension
manager

Initial flow
Consecutive actions

Solutions for the asset management industry

Allocation processing
What asset managers need is a service that caters for both
their in-house flows (where they choose the custodian and
broker) and their third-party mandates (where the client
chooses the custodian and sometimes brokers for research).
Take the example of an institutional asset manager
called Iberian Asset Management, which provides asset
management services for a number of its own funds and
for pension plans). It will typically have a set of portfolio
models that it executes across a number of clients. The
underlying pension plan or fund will have its own custodian
relationships that will have to be used by asset manager.
In a similar trade to the one mentioned above, Iberian buys
100,000 Microsoft from Citi in the US. Citi executes the
order and advises Iberian of the fill. As Iberians trades are
always configured to be allocated, Citi expects to receive
an allocation instruction for the shares. Currently this is
generally performed through Omgeo and the services
it offers. However, if Iberian sends the order and the
allocation via FIX to Citis Order Trade Manager (OTM), Citi
will match the confirmation and allocation, and create the
corresponding settlement instructions to settle against
the underlying funds. This process eliminates the cost
of Omgeo and also eliminates the need for settlement
instruction issuance and management, resulting in
productivity gains and cost reduction.

The integrated execution-to-custody (E2C) model that Citi

has been proposing to the brokerdealer and private bank
communities for some years now offers major advantages
to the asset management community. This is a model that
combines Citis brokerage capabilities with its clearing and
settlement expertise. E2C automates the post-trade process.
By automatically creating the settlement instructions, it
reduces settlement costs and operational risks.
Some asset managers are already enjoying a simplified version
of E2C where their service provider acts as an intermediary
broker in the chain, distributing the trades to underlying
brokers. However, the idea with E2C is to reduce the number of
intermediaries to a minimum, including at the brokerage level,
by directly using Citis brokerage structure. Up the chain, the
brokerage service can be complemented with research services;
down the chain, with integrated clearing and settlement.
E2C is an end-to-end service that offers huge pluses for asset
managers. It provides access to alternative trading platforms
(MTFs), offering best execution, and the ability to connect
to all the relevant clearing houses (CCPs), thereby allowing
cross-margining. It offers the most efficient settlement
services globally, thanks to Citis proprietary network of
subcustodians in more than 60 countries. And finally it
incorporates the turnaround function, automated third-party
settlement and allocation services mentioned above.
Thanks to the allocation and automated third-party
settlement functions, asset managers can enjoy this
streamlined process and receive the securities directly
in their account with the corresponding depository.
Reallocation becomes a thing of the past.
As is apparent from the brokerdealer world, there is a
strong first-mover advantage here. The post-trade process is
becoming an increasing focus of attention and an area where
efficiency can really make a difference. A less efficient posttrade process is a cost to the fund and it will affect its ranking.
At Citi, we understand that operations are now a crucial element
of competitiveness. The combination of services within E2C
presents a major advance for the asset management industry,
allowing asset managers to benefit from the same efficiencies
many brokerdealers and private banks already enjoy.
With our long-standing involvement in every stage of the
securities trade cycle, the breadth of our client base and our
commitment to continuous investment, we are well placed to
push the boundaries of what is possible in the post-trade world
and replace complexity with simplicity wherever possible.

AM industry: Current model

More information
Edward Duff
E2C Sales EMEA
+44 (0) 207 500 1146
edward.duff@citi.com

Asset manager

Intermediary broker

Eugene O'Herlihy
E2C Sales EMEA
44 (0) 207 986 0752
eugene.oherlihy@citi.com

Broker 1

Broker 2

Broker 3

Broker 4

Clearer
broker 1

Clearer
broker 2

Clearer
broker 3

Clearer
broker 4

Citi OpenInvestorSM is the investment services solution

for todays diversified investor, combining specialised
expertise, comprehensive capabilities and the power of
Citis global network to help clients meet their performance
objectives across asset classes, strategies and geographies.
With an on-the-ground presence in over 95 countries and
over USD13.9 trillion in assets under custody, Citi offers
award-winning service and unmatched scale.

AM global custodian

Allocations market settlement

Depository
fund 1

Nigel Solkhon
E2C Product EMEA
+44 (0) 207 508 9215
nigel.solkhon@citi.com

Depository
fund 2

Citi also provides complete investment services for

institutional, alternative and wealth managers, delivering
middle-office, fund services, custody, and investing
and financing solutions focused on its clients specific
challenges and customised to their individual needs.

Sometimes used

Streamlining the process for AM

Asset manager

Primary
exchanges

EC2
MTFs
Citi Global Markets

CCP

CCP

CCP

Access to 96 markets,
of which idrect access
to CSD in 60+ markets

Alternative
brokers

Citi as Custodian

Depository
fund 1

Depository
fund 2

www.citi.com/securitiesandfundservices
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