Citigroup Inc’s loss on a surge in the Swiss franc last month was exacerbated by the bank’s decision to let protections against currency swings lapse a week earlier, according to people with knowledge of the matter.
The bank did not renew derivatives trades that would have blunted the impact from Switzerland’s surprise move to let its currency rise, the people said, who asked not to be identified. The company’s losses exceeded US$200 million in the hours after the announcement, before traders pared the deficit down to about US$150 million, the people said.
The loss at Citigroup, which surpassed Deutsche Bank AG last year as the world’s biggest foreign-exchange dealer, illustrates the perils of unhedged trading in the currency markets. Citigroup has faced particular scrutiny of its ability to manage risks after soured mortgage holdings forced it to draw more taxpayer support than any other US bank during the financial crisis of 2008 and 2009.
Citigroup was exposed after selling options on the Swiss franc to customers and failing to renew offsetting hedges, according to one of the people. The options gave buyers the right to collect from a strengthening Swiss franc and higher volatility. While the derivatives desk lost money that day, the spot currency desk turned a profit, one person said.
Competitors, including JPMorgan Chase & Co — said to reap US$300 million on the franc’s move — had largely kept their safeguards in place, two people said.
While the expiration of hedges contributed to the losses, a greater portion came from customer trading, Citigroup New York-based spokeswoman Danielle Romero-Apsilos said.
“As a result of our role in making markets and facilitating trades for clients, Citi experienced a modest loss,” she said in a statement. “Expiration of hedges related to the [Swiss] franc did not drive the shortfalls in our trading activity, all of which was executed under our existing rigorous risk management limits and supervision.”
Citigroup risk managers were aware that the firm’s hedges had not been replaced, one of the people with knowledge of the strategy said. They expired about a week before the Swiss National Bank’s decision, another person said.
Citigroup chief financial officer John Gerspach sought to reassure analysts when questioned about the Swiss franc’s swing.
“Since that event, we’ve seen good activity levels from our customers in the FX [foreign exchange] markets,” he said during a conference call. “We’re going to continue to work closely with our clients to help them manage their currency needs.”
The Swiss central bank gave little indication it was considering a policy change. On Dec. 18, Swiss National Bank Chairman Thomas Jordan said officials stood ready to further intervene in currency markets to counter a strengthening franc. On Jan. 13, Swiss National Bank Vice Chairman Jean-Pierre Danthine re-affirmed the currency cap as a “pillar of our monetary policy.”
Two days later, officials sprang the surprise announcement.
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