Citigroup struggled to monitor UK traders reaping $3.1 billion

Bloomberg

In 2017, after Citigroup Inc had paid billions of dollars in fines for rigging interest rates, manipulating currency markets and selling shoddy mortgage bonds, the Wall Street giant was still struggling to keep tabs on traders in London.
Managers overseeing Citigroup’s European trading hub had hundreds of blind spots, allowing for potentially abusive transactions to go unnoticed in the almost 900,000 trades processed every day at the bank’s Canary Wharf headquarters, according to a report from the UK Financial Conduct Authority (UK FCA). The shortcomings carried on for at least two years, enough time for the traders to generate about $3.1 billion in revenue, the report shows.
Internal compliance teams found that their surveillance systems missed almost half of the second-most serious category of trading risk, the FCA said as it imposed a £12.6 million penalty on New York-based Citigroup. Officials couldn’t effectively monitor trading activities for potential insider dealing and spoofing until early 2018, the regulator said.
Citigroup CEO Jane Fraser, who oversees one of the world’s biggest investment banks, is under pressure to improve controls after multiple probes revealed what regulators have said are substantial problems.
The Bank of England levied a record £44 million fine on the lender in 2019 for years of inaccurate reporting about its capital and liquidity levels, while US regulators doled out a $400 million fine in 2020 for persistent problems with risk management. Hong Kong’s securities regulator fined it HK$348.3 million earlier this year for “dishonest” stock trading over a decade.
In January 2018, when Citigroup’s compliance teams scrambled to assess the effectiveness of its automatic surveillance systems, they discovered that they had no oversight of almost half of what they called tier 2 trading risks. The surveillance gaps occurred across some of the bank’s largest trading businesses including rates and commodities.
The multiple shortcomings convinced Citigroup that it was not in compliance with European market-abuse laws, which the UK implemented in 2016.
The compliance group’s senior leadership team has since changed, the FCA said, and the identified surveillance gaps were fixed by the end of 2018.
Fraser, who became CEO in early 2021, is overseeing a year-long campaign to shore up internal systems and data programs that will end up costing Citigroup billions of dollars. The bank agreed to resolve the FCA case, qualifying for a 30% discount on its fine.
Citigroup is home to a behemoth trading business that makes billions of dollars every year from buying and selling everything from stocks and government bonds to complex derivatives. The division reported almost $15 billion of revenue in 2017.
The division, which traces its roots to former Wall Street powerhouse Salomon Brothers Inc., has a troubled recent history. Some of the trades that resulted in fines over the years occurred at Citigroup’s fixed-income trading division in London, which deals in products tied to interest rates, FX, corporate debt and commodities. But almost a decade after the financial crisis, risk officials were still struggling to properly monitor this business, the FCA report shows.
While Citigroup officials were comfortable with their oversight of the FX-trading business, they identified dozens of risks elsewhere at the fixed-income division, as well as in its equities unit, that were not under surveillance, according to the FCA.
At Citigroup’s rates-trading business, which deals in government bonds and derivatives linked to interest rates, officials flagged 5 tier-2 risks and found that none of them were being covered. The bank’s commodities unit, which was the joint-biggest in the world that year, had 10 such risks but only 5 of them were under surveillance. And a business dealing in corporate debt and securitised products had 18 similar threats and less than half of them were being observed.
In a separate case, the FCA’s own data engine picked up potentially suspicious trading by a Citigroup credit trader in late 2017 before the bank’s own compliance teams fired him for spoofing.