Citigroup fined £14m for bond deal

THE City's top watchdog today slapped a £13.9m fine on Citigroup, the world's largest financial services firm, for a series of controversial bond trades last summer.

It is the biggest fine ever levied on a City-regulated bank by the Financial Services Authority after Citigroup was found to be 'failing to conduct its business with due skill, care and diligence and failing to control its business effectively'.

Last August, Citigroup traders suddenly sold £7bn of European government bonds, but within minutes repurchased nearly £3bn at lower prices - overwhelming electronic trading centres but bagging a tidy profit of nearly £10m.

The trade, carried out by Canary Wharf-based Citigroup Global Markets bankers, rocked Continental markets, angered European governments and caused German financial regulators to even start examining whether criminal charges should be brought to bear on the bank.

But today, the head of Citigroup's European investment banking division, Bill Mills, said the five traders involved in the deal would return to full-time work - they had been suspended pending regulatory investigations - and could hold on to their pay from last year's work.

Citigroup has, however, accepted the £13.9m penalty which the FSA said was accounted for as a 'relinquishment of the profits from the trading' of just over £9.96m and 'an additional penalty of £4m'.

Until today's fine, Credit Suisse held the ignominious title of the largest FSA fine for a City firm - £4m in 2002 for alleged manipulation of the Japanese markets.

Citigroup will be relieved that the FSA did not find that it deliberately set out to mislead the market, which would have resulted in a far higher penalty and wrought even greater harm to its reputation.

Hector Sants, the FSA managing director for wholesale business, said: 'The FSA expects high standards from all its regulated firms but especially from firms such as CMGL [ Citigroup Global Markets Limited], whose size and resources allow them to trade in large volumes and take significant risks.'

Citigroup's Mills said the bank was already engaged in 'aggressive and far reaching' changes to its culture and training, enacting a plan set out last year by group chief executive Chuck Prince.

In a statement explaining the background to the breach, the FSA said that during July 2004, the European government bond desk at CGML was encouraged to increase profits through increased proprietary trading and the development of new trading strategies.

In pursuit of this, the desk developed a trading strategy to take advantage of the increased liquidity on the MTS electronic trading platform in European government bonds. The strategy proposed that the desk create a 'basis position' whereby it became long in cash bonds and short in futures, then on a given day close out the short futures position by buying futures contracts, leaving a long cash position; and then selling quickly the long cash position on MTS utilising a spreadsheet-based programme to capture all firm bids for a large number of bonds within a specified price range.

The strategy was escalated to senior management, but Citigroup did not ensure that clear parameters for the size of the trade were understood, communicated and reviewed.

On the morning of 2 August 2004 between 09:12 and 10:29 the desk bought 66,214 futures contracts on Eurex (equivalent to 55,000 Bund futures). Then between 10.28 and 10.29 the desk sold €s;11.3bn of bonds in 18 seconds on MTS, which was equivalent to an average day's trading volume on the platform, and also sold around €s;1.5bn on other domestic cash markets resulting in a total sale of €s;12.9bn bonds. This left CGML with an unexpected short position which was closed out at 11.25 through the purchase of €s;3.8bn of bonds on MTS. In doing so CGML bought back at a lower price some of the bonds it had earlier sold, further adding to their profit.

The effect on MTS was a temporary disruption to the volume of bonds quoted and traded on the platform, sharp falls in bond prices and in some cases the temporary withdrawal of some participants from quoting on that platform.

CGML made a profit of £9,960,860 on 2 August 2004 as a result of the sale of the long cash position and subsequent buy-back of cash bonds.