The breach of these principles relates to 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, said: "The FSA views firms' adherence to its principles as fundamental in helping to maintain efficient, orderly and fair markets.
"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.
"The FSA expects high standards from all its regulated firms but especially from firms such as CGML, whose size and resources allow them to trade in large volumes and take significant risks."
During July 2004, the European government bond desk at CGML was encouraged to increase profits through increased proprietary trading and the development of new trading strategies.
In pursuit of this the desk developed a trading strategy to take advantage of the increased liquidity on the MTS electronic trading platform in European government bonds. The strategy proposed that the desk create a "basis position" whereby it became long in cash bonds and short in futures, then on a given day close out the short futures position by buying futures contracts, leaving a long cash position; and then selling quickly the long cash position on MTS utilising a spreadsheet-based programme to capture all firm bids for a large number of bonds within a specified price range.
The strategy was escalated to senior management, but Citigroup did not ensure that clear parameters for the size of the trade were understood, communicated and reviewed.
On the morning of 2 August 2004 between 09:12 and 10:29 the desk bought 66,214 futures contracts on Eurex (equivalent to 55,000 Bund futures). Then between 10.28 and 10.29 the desk sold EUR11.3 billion of bonds in 18 seconds on MTS, which was equivalent to an average day's trading volume on the platform, and also sold around EUR1.5 billion on other domestic cash markets resulting in a total sale of EUR12.9 billion bonds. This left CGML with an unexpected short position which was closed out at 11.25 through the purchase of EUR3.8 billion of bonds on MTS. In doing so CGML bought back at a lower price some of the bonds it had earlier sold, further adding to their profit.
The effect on MTS was a temporary disruption to the volume of bonds quoted and traded on the platform, sharp falls in bond prices and in some cases the temporary withdrawal of some participants from quoting on that platform.
CGML made a profit of $18.2 million (£9,960,860) on 2 August 2004 as a result of the sale of the long cash position and subsequent buy-back of cash bonds.
The FSA Principles require that firms conduct their business with due skill, care and diligence. In planning, authorising and executing this trading strategy without having due regard to the likely risks and consequences the strategy could have for the efficient and orderly operation of the MTS platform, CGML failed to meet this requirement.
The regulaor says CGML also failed to take reasonable care to organise and control its affairs responsibly and effectively by having adequate risk management systems. This was seen in the failure to escalate the detailed trading strategy adequately and in advance to senior management, the absence of adequate systems for the supervision of its traders and failing to provide sufficient training in standards of market conduct.
The FSA acknowledges that CGML has co-operated fully in the course of the investigation, that senior management in the firm have taken the matter seriously and recognise that significant remedial work has been taken in the areas where controls were lacking.
