Lawyer Disturbed By Citigroup Ruling

by Robin Pilgrim, LawAndTax-News.com, London

04 July 2005

Speaking to Reuters last week, Freshfield Bruckhaus Deringer partner, Guy Morton warned that the recent move by the UK's financial services regulator to fine Citigroup over eurobond trades could have disturbing implications for other banks.

The Financial Services Authority announced last Tuesday that it had fined Citigroup Global Markets Limited (CGML) £13.9 million for breaching FSA Principles 2 and 3 by failing to conduct its business with due skill, care and diligence and failing to control its business effectively.

The FSA found that CGML executed a trading strategy on the European government bond markets on 2 August 2004 which involved the firm building up and then rapidly exiting from very substantial long positions in European government bonds over a period of an hour. The trade caused a temporary disruption to the volumes of bonds quoted and traded on the MTS platform, a sharp drop in bond prices and a temporary withdrawal by some participants from quoting on that platform.

Hector Sants, FSA Managing Director for Wholesale Business, explained last week that:

"The FSA views firms' adherence to its principles as fundamental in helping to maintain efficient, orderly and fair markets."

He continued:

"CGML planned, authorised and executed a trading strategy without having due regard to the risks and likely consequences of its action for the efficient and orderly operation of the MTS platform. Furthermore the lack of adequate systems and controls meant that the strategy was never fully considered, as would be expected, at an appropriate senior level within CGML."

However, Mr Morton suggested that all firms which execute large trades may now potentially find themselves facing legal action of this kind.

"Now it seems that they are required to consider whether their trading might 'adversely affect' the price, quotation levels or market confidence," he observed.

The Freshfields lawyer went on to add that the FSA had effectively broadened the remit of its market abuse regime, without consulting the financial services industry.

"This is a disturbing precedent," he concluded.

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