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Citigroup faces record FSA fine

Financial Times: Citigroup faces record FSA fine

 

By Päivi Munter in London

Published: June 1 2005

 

Citigroup faces the largest-ever fine imposed by UK regulators for a bond market deal following the transactions that shook eurozone government debt trading last August, people close to the investigation said yesterday.

 

They said the UK Financial Services Authority was expected to fine the US group for a lack of internal controls, rather than for market manipulation – a preferred outcome for Citigroup.

 

However, it is thought a fine could amount to millions of pounds – possibly exceeding the €17.5m ($22m) profit the bank made on the controversial transactions.

 

The FSA’s biggest fine to date was the £17m ($31m) it levied on Royal Dutch/Shell last year for irregularities in its oil and gas reserves reporting.

 

Neither the FSA nor Citigroup would comment yesterday, although the bank has apologised for the trades, which caused liquidity on the EuroMTS electronic trading platform to dry up, angering eurozone governments.

 

On August 2 last year, Citigroup stunned the eurozone government bond market by selling €12.4bn of the paper within seconds, only to buy back €4bn at lower prices slightly later. The aggressive trades simultaneously swept across rival dealers’ obligatory bid quotes on the UK-based EuroMTS trading system, a prospect many banks had not covered.

 

An internal Citigroup memorandum, published before the trades, said they were part of a strategy aimed at reducing the influence of the Eurex derivatives exchange and to “turn the European government bond market to one that more closely resembles” the less transparent US Treasuries market.

 

The Eurex sanctions committee will meet today in Frankfurt to hear evidence from Citigroup and the exchange’s management.

 

If the committee finds that Citigroup manipulated the market, it could exclude the bank and the traders from Eurex, the most liquid venue for trading eurozone government paper, for a maximum of 30 days. It could also levy a €250,000 fine per trader involved, with an additional €250,000 fine for the bank.

 

“I’m pretty sure there will be no final decision on Wednesday,” an official at the Exchange Supervisory Authority in the German state of Hesse said yesterday. “The committee will probably need more time to consider the evidence.”

 

Citigroup’s aggressive tactics have prompted plans to sell MTS, the operator of the EuroMTS platform. ESpeed, which operates a US Treasury bond platform, and a consortium of Euronext and Borsa Italiana is vying for the operator.

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