Prop trading on Wall Street lives on as Citi is smacked with fine by SEC

  • Citigroup was smacked with a fine by the SEC this week over allegations of proprietary trading by three rogue employees from 2013 to 2016.
  • Prop trading, the practice of banks buying and selling securities on their own behalf rather than for clients, was banned following the financial crisis.
  • Separately, Citi settled charges of inadequate controls stemming from fraudulent loans issued by its Mexican subsidiary, Banamex, that cost the bank $US475 million.
  • Citi paid a total of $US10.5 million in fines but admitted no wrongdoing in either case.

It was banned following the financial collapse, but proprietary trading by Wall Street banks lives on.

Citigroup was smacked with a $US10.5 million fine by the Securities and Exchange Commission this week over multiple infractions, including allegations that from 2013 to 2016 rogue Citi traders participated in prop trading – the practice of banks buying and selling securities on their own behalf rather than for clients.

The SEC found that three Citi traders mismarked illiquid positions in proprietary accounts over the three-year period, in two cases covering losses from “widespread unauthorised trading,” the regulator said in a statement Thursday. After discovering the breach, Citi fired the traders and booked $US81 million in losses connected to their trading.

Citi agreed to pay $US5.75 million to settle charges of lack of oversight and inaccurate bookkeeping, but admitted no wrongdoing.

Regulators enforce a provision of the Dodd Frank Act known as the Volcker Rule, which went into effect in 2015. The rule bans banks from trading for their own account, and forces firms to prove that their trading is done solely for the purpose of meeting client demand. Under President Trump, regulators have proposed subtle changes to the rule in an effort to make it easier to comply.

The SEC did not explicitly state that Citi had violated the Volcker Rule.

In a separate infraction, Citi paid $US4.75 million to settle charges of inadequate controls stemming from fraudulent loans issued by its Mexican subsidiary, Banamex, from 2008 to 2014 that cost the bank $US475 million. Citi admitted no wrongdoing.

“Citigroup’s lax supervision and weak internal accounting controls allowed a handful of rogue traders to mismark positions over several years and, separately, resulted in the unnecessary loss of hundreds of millions of dollars of its shareholders’ assets to fraud,” Marc Berger, director of the SEC’s New York office, said in the statement.

“We are pleased to have these matters resolved,” Citigroup spokeswoman Danielle Romero-Apsilos told Business Insider in an emailed statement.

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