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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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relationship managers looking to maximize their
client engagement. In many instances, this resulted
in the same client organization having multiple points
of coverage from the same bank. This is illustrated in
Chart 31.
This structure resulted in a fragmented approach
to client coverage. A valued client in the broker-
dealer organization that received top tier service may
have few dealings with the custody bank and their
requests from that part of the organization may be
deprioritized relative to the custody bank’s own set of
premiere clients. The reverse was also true with the
broker-dealer often deprioritizing a top tier custody
client’s requests. The result was a structure that
failed to recognize and administer services in line with
a client’s overall enterprise value.
Post-GFC, as balance sheet concerns and emerging
Basel III requirements impact the margins and
profitability of the banks, many organizations are
realizing that they need to focus their provision of
resources and services more exclusively on their
most important clients. This makes understanding
the enterprise value of a client increasingly critical.
As such, market-leading banks are beginning to retool
their sales organizations to look more broadly across
their set of services. Revenues being realized in each
area of the bank are being considered holistically in
order to identify those clients that matter most to the
organization as a whole. A side benefit of this new
approach is that there is a greater understanding of
the client’s use of services and a more open dialog
around how to best cross-sell services to maximize
the organization’s penetration of the client’s wallet.
Services that touch similar parts of the asset owner’s
organization are being brought together in a new
organizational construct illustrated in Chart 32.
In the new configuration, client information and
systems are maintained separately to provide the
required levels of segregation and confidentiality,
but communication and understanding of the client’s
broad set of goals is enhanced. A single team of
individuals is dedicated to the client’s coverage and
the sales lead on this “solutions” team can bring in
product specialists and other experts that can design
a bespoke “bundle” of services that offers asset
owners multiple routes to market from across the
entire new organization in order to optimize the use
of their supply.
In the emerging model, agent lenders will continue
to auction supply out to a broad pool of lenders to
ensure best execution, but other options may be
presented for those portions of their inventory that
remains unutilized. Working with more solutions-
oriented coverage teams, the agent lender can now
more easily encourage their client to direct a portion
of their lendable supply to their colleagues in the
principal or synthetic lending businesses where there
might be other routes to market that the asset owner
is interested in pursuing. Revenues from all of these
transactions would accumulate to the same division,
thus removing a potential hurdle from the legacy
organization that may have limited cross-selling
interest in the past. This new approach is broadly
being termed “asset or supply optimization.”
Similarly, there is an opportunity for “collateral
optimization” in this new construct. As noted
earlier, demand for high quality liquid assets to post
as collateral is expected to surge due to new OTC
clearing rules. If the agent lender has exhausted their
ability to place supply across their network and their
sales colleagues in the principal and synthetic loan
areas are not able to identify a use for a portion of
Chart 31: Traditional Lender & Client
Relationship Model
Prime Brokerage
Client/Asset Owner
Custody & Collateral Management Services
Principal
Lending
Synthetic
Lending
Agency Lending
Derivatives
Clearing
Derivatives
Collateral
Management
Source: Citi Business Advisory Services
Broker-Dealer
Custody Bank
Client/Asset Owner
Chart 32: Emerging Client Relationship Model
Unified Bank Services
Client/Asset Owner
Custody & Collateral Management Services
Principal
Lending
Synthetic
Lending
Agency Lending
Derivatives
Clearing
Derivatives
Collateral
Management
Source: Citi Business Advisory Services
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