Bond trading probe at Citigroup

THE Financial Services Authority has launched a full investigation into 'unusual' bond trading by US bank Citigroup after an outcry by rival dealers who say it broke a 'gentleman's agreement'.

The City regulator says the probe 'may lead to formal disciplinary proceedings'.

The inquiry is focused on the sale of £742m European bonds on 2 August by Citigroup, which is thought to be eyeing up Barclays.

Rival firms are angry that the huge sale caused a slump in prices, then Citigroup jumped back into the market and bought bonds at a cheaper price.

Citigroup is not believed to have done anything illegal, but the FSA is concerned that the trading affected the market's stability. Bond traders estimate that the bank could have made a £20m profit from the deals.

The FSA takes a dim view of anything that causes disorder in financial markets. It made preliminary inquiries into the sale when it became known. The watchdog would not have launched a full probe unless it believed that its rules may have been breached.

It wants to study whether the bank had sufficient systems and controls and whether it deliberately dumped the bonds to hit the price. If there is a breach, Citigroup could face an unlimited fine.

Citigroup said: 'We will, of course, co-operate fully as with any regulatory inquiry. Beyond that, it is not appropriate for us to comment.'