FSA Fine on Citigroup is total nonsense

The order that the Financial Services Authority (FSA) of the UK has passed against Citigroup Global Markets Limited (CGML) in the Euro MTS case imposing a fine of $25 million is total nonsense. Clearly, the FSA lacked either the evidence or the courage to say that Citigroup had manipulated the markets. At the same time, the FSA was unwilling to let them off without any penalty. What they have done therefore is to impose a penalty under regulations that have no bearing on the case at all. This means a penalty is imposed without having to prove any serious charges against Citigroup.

The event that led to the fine was quite simple. On 2 August 2004, Citigroup “executed a trading strategy on the European government bond markets which involved the building up and rapid exit from very substantial long positions. The centrepiece of the strategy was the simultaneous execution of a large number of trades on the MTS platform using specially configured technology.”

FSA claims that in executing these trades, Citigroup contravened the following two Principles of Business of the FSA:

• “A firm must conduct its business with due skill, care and diligence”
• “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”

On the face of it, it is difficult to see how Citigroup's trading violated either of these principles. On the contrary, it would appear that its actions demonstrated a high degree of skill and sound risk containment systems.

FSA however believes that due skill and care were lacking because Citigroup did not consider the likely consequences of the execution of the trading strategy could have for the efficient and orderly operation of the MTS platform. This statement is absolute nonsense. The whole strategy was predicated on a clear understanding of these consequences which were highly beneficial to Citigroup. More importantly, Citigroup's understanding of these consequences was quite correct.

FSA also believes that there were

• “a failure within CGML to escalate the detailed trading strategy on 2 August 2004 adequately and in advance to senior management, and a failure to consult with applicable control functions” and
• “inadequate systems for the supervision of traders”.

This would be a perfectly valid argument provided the FSA had first established that the trading strategy itself violated the rules of market conduct. The FSA does not however want to assert that the trading strategy was manipulative. If it does not do so, then it is difficult to see why a trade, even if it is very large, needs clearance from senior management.

I think the FSA has simply taken the easy route out. Perhaps, for Citigroup too, paying a $25 million fine is an easy solution to its problems.

Posted at 12:56 pm IST on Wed, 29 Jun 2005         permanent link

Categories: manipulation, regulation, risk management

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