Official FSA inquiry into Citigroup's £15m bond coup

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The Independent Online

The Financial Services Authority confirmed it has launched an official investigation into a bond trading coup by Citigroup, the world's biggest bank.

The Financial Services Authority confirmed it has launched an official investigation into a bond trading coup by Citigroup, the world's biggest bank.

Earlier this month, Citigroup netted up to £15m after dumping £7.4bn worth of bonds on to an unsuspecting market in less than two minutes.

The unprecedented bear raid infuriated rivals who thought they were protected by a "gentleman's agreement".

Yesterday, the FSA confirmed its investigation could lead to a fine or public censure of Citigroup. An FSA spokesman said: "Our key aims include maintaining efficient, orderly and clean financial markets. In our view, achievement of that aim requires large players in the financial markets to have regard to the likely consequences of their trading strategies in the market concerned."

A spokeswoman for Citigroup said the bank would co-operate with the inquiry but declined to comment further.

On 2 August, on a slow Monday morning, Citigroup triggered a cascade of selling on to the eurozone bond market, using 100 different financial instruments and 13 trading systems, 11 of which were on the electronic MTS system.

This exchange, based in Milan, accounts for about 70 per cent of electronic trade in European government bonds. Primary dealers are obliged to provide quotes in certain government bonds, which forced rival traders to react to Citigroup's move.

Prices slumped under the onslaught as dealers in rival firms desperately tried to cover positions by selling futures. The bonds were dumped in less than 120 seconds. An hour later, Citigroup traders were back in the market, buying furiously. After shelling out about £4bn, they retired to tot up their winnings.

At first, bond traders thought the carnage had been the result of a mistake. After it emerged that the raid had been deliberate, leading figures from the industry met in London to debate the issue.

They concluded that little could be done, and decided to wait for the reaction of the FSA, which has been briefed by both Citigroup and MTS.

In the wake of the raid, the MTS has altered its rules to restrict size and volumes of trades over a two-minute period to a maximum of €1bn or 20 per cent of the daily turnover averaged over the past 10 trading days. The Citigroup trades amounted to about 40 per cent of the average daily turnover on MTS.

Bond traders have already protested about the plans to limit trading, arguing that it could restrict liquidity in the market. However, rival trading platforms, such as eSpeed and BrokerTec, which dominate bond trading in the US Treasuries, allow dealers to decide whether or not they wish to trade.

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