June 28, 2005
Fair and Orderly Markets
Posted by Caroline Bradley

The story of Citigroup's trades in European Government bonds last summer seems to have wound up as the Financial Services Authority ordered Citigroup Global Markets Limited (CGML) to pay up a “fine” of £13.9 million (around $25m), made up of a penalty of £4 m and a “relinquishment of profits” of £9,960,860. The details of what the FSA found are here. Traders at CGML decided they had found a neat way to make profits through a combination of buying futures and selling bonds (they called their trading strategy “Dr Evil”). On one day in August 2004 they went too far and found they had to cover short positions by buying bonds at prices lower than those they had just sold them for (what luck! - well, no- people noticed). This behaviour reduced confidence in MTS, the trading platform (no kidding). According to the FSA, the trading strategy was not considered by Compliance, Legal or independent Risk Management at CGML before it was implemented, one of the traders was not not registered with Eurex, so unauthorised trading occurred, and the only market abuse training CGML had held was on 1 December 2001 (although CGML did have some material available about market abuse). The FSA concluded that CGML failed to comply with Principle 2 in failing to act with due skill care and diligence and noted that CGML was making improvements to its compliance procedures. The FSA characterised CGML’s breach as serious, although CGML did not deliberately set out to disrupt the trading platform, and was not reckless. Citigroup's Charles Prince said that:

Citigroup is committed to maintaining the highest standards of business ethics, to advancing best practice leadership in all its businesses and to fostering a culture of compliance that is second to none.

Presumably Prince doesn't mean that Citigroup's culture of compliance last summer was second to none (or perhaps he does).

Well, the embarrassment is probably more significant than the fine (most of the payment is after all disgorgement) but the FSA did a good job of minimising the embarrassment. Perhaps they have been taking the literature on negotiated governance too seriously.

After reading the FSA's Final Notice on the CGML matter I'm struck by the contrast between this decision and the FSA's regular recitation of its commitment to maintaining efficient, orderly and clean markets. Perhaps what they should really be saying is markets that are a little grubby round the edges, but basically clean.

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