Operator ‘astonished' by Citi memo
The head of the trading platform on which Citigroup conducted a number of controversial trades in August yesterday expressed “astonishment” at a Citigroup memorandum, obtained by the Financial Times, which outlined a strategy to “kill off some of the smaller dealers” in the highly competitive eurozone government bond market.
Gianluca Garbi, chief executive of MTS, demanded to see the document, written two weeks before Citigroup bombarded the pan-European network of MTS trading platforms, selling about �11bn of eurozone government debt within a matter of seconds and buying �4bn of it back at lower prices for an estimated �17m profit.
The memo, sets out a plan for exploiting liquidity differentials on MTS and Eurex, the Frankfurt-based derivatives exchange, “in a very profitable way”.
Mr Garbi said: “As a regulated market, we are obliged to get hold of this type of information and I will be writing to Citigroup today.”
The German government bond futures traded on Eurex are the backbone of the eurozone debt market, as they are used to price all of the region's government bonds. Liquidity on Eurex varies sharply according to the season, while dealers on MTS are obliged to provide continuous quotes a concession to eurozone governments which are keen to maximise trading in their bonds.
Citigroup's memo, entitled “How to challenge the dominance of Eurex futures”, says big trades that take advantage of other dealers' obligatory price quotes on MTS could be used to “turn the European government bond market into one that more closely resembles the US government bond market”.
In the US most government bonds are traded over the counter, giving the dealing banks more influence over prices than in the more transparent and competitive eurozone market.
The memo, apparently written by a member of the London-based European government bond trading team to another, advises: “When there is a liquidity imbalance . . . we drive up the Bund future [and] then hit out all the cash [bids] on MTS.”
The bank's August trades have angered eurozone governments, as they disrupted the market for their bonds, and are being investigated by several European financial regulators, led by BaFin in Germany and the UK's Financial Services Authority.
On Monday Citigroup said the memo “was filled with inappropriate and unrealistic statements” and added that it “had not been seen by, nor does it represent the views of, the supervisors who authorised the trade or the firm”.
The prosecutor's office in Frankfurt, which is undertaking a criminal investigation into suspected market manipulation by Citigroup on the Eurex exchange, yesterday said the probe centered on six members of the US bank's European government bond trading desk in London, including the head of the team.
Citigroup declined to comment yesterday.
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