Both parties are in discussions on the positions and how they should be valued, stated people with knowledge of the talks, who asked not to be identified because discussions are private. The situation remains fluid and the eventual losses may end up being smaller depending on how the trades are unwound, stated the people.
The matter was escalated to Citigroup’s board, according to one person. The bank is also reorganising its prime brokerage business as a result of the expected financial hit, the person stated. It is taking the foreign exchange prime brokerage unit out of its currency division and placing it under the oversight of its prime finance and securities services unit, according to a memo from the bank.
Chris Perkins, who leads the bank’s over-the-counter clearing business, will become head of the foreign exchange prime brokerage, stated the company said in the memo. Sanjay Madgavkar, who ran the foreign exchange prime brokerage unit and has worked at Citigroup for more than 20 years, is leaving the firm, the person also added. Madgavkar declined to comment, as did Scott Helfman, a spokesman for the New York-based lender.
The episode shows that banks are beginning to feel some of the pain that has besieged the hedge fund industry this year as geopolitical tensions around the world have spurred dramatic swings in asset prices. The $3.2trn industry is on track to post its worst performance since 2011, and hedge funds with a focus on Asia have struggled in particular.
John Gerspach, the Citigroup chief financial officer, has stated this month that momentum in rates and currencies trading had not carried over from the third quarter and the firm was likely to post a YoY decline in fixed-income trading revenue this quarter.
The reorganization comes at a time when Citigroup has been expanding its prime finance business, which is a part of its equities trading division and helps hedge funds in borrowing stocks, funding, transactions and risk management.
At the firm’s investor day last year, Citigroup said it had increased balances from prime brokerage clients by 40% since 2014 and noted its revenue growth in the business doubled that of its Wall Street peers.
But lending through the prime brokerage can bring the risk of large swings in revenue. The firm said in July 2015 it would take a $175mn charge from prime finance when it cut the value of collateral underlying loans to facilitate customer trading activity. Three months later, the lender reversed $140mn of the valuation adjustment.