This week in unsupervised trading, a small British hedge fund – LNG Capital – plunged Citigroup into a panic after risk-control issues tied to the fund’s trades left the banking giant exposed to as much as $400 million in write-downs.
As the Wall Street Journal reports:
“LNG is a small fund, with about $150 million in assets. Most of its trades went through automated systems with infrequent human interaction on Citigroup’s part, the people said. On the dates LNG entered trades, Citigroup’s systems erroneously assigned higher than intended values to the bonds LNG held in its account, the people said.
According to the people, the systems got tripped up by expecting buy and sell orders to settle together, effectively canceling each other out. Instead, with some of the trades, which went on through May and June, one leg actually didn’t settle for weeks. As a result, Citigroup inadvertently kept extending credit to LNG, allowing it to buy about five times the value of securities as would have been allowed under normal risk limits, even as risks mounted for the bank.”
When the bank finally caught on to the problem, it was forced to demand around $400 million from LNG, an amount the tiny fund simply could not afford.
It has since recouped all the cash though, and has added several more controls to prevent something similar from occurring.
Photo: Herve Boinay