Citigroup suffered a technology glitch at the height of the market panic over coronavirus that left it relying on the grace of an exchange clearing house to prevent the bank from defaulting on margin payments for derivatives contracts.
The bank had a problem with payments technology that meant it was late to meet a margin call from a US clearing house run by Intercontinental Exchange in March 2020, according to several people familiar with the matter.
Derivatives executives told the Financial Times that malfunctions leading to missed margin calls were rare but not unheard-of. The incident highlighted the extent to which the financial system was under stress during the market sell-off at the onset of the pandemic.
The technology snafu was one of several at Citigroup in recent years. US regulators fined Citi $400mn in October 2020 over “longstanding deficiencies” in its risk and control systems.
In the summer of 2020, a so-called fat finger error resulted in a $900mn loan being paid back to lenders of Citi’s client Revlon, instead of the intended interest payment of less than $8mn.
This year, erroneous trades were placed by a trader at the bank on European stocks, causing a mini-flash crash.
Chris Edmonds, Ice’s chief development officer, alluded to the March 2020 glitch during a May 25 roundtable discussion convened by US regulators in Washington on whether to allow automated risk management in the leveraged futures markets, as opposed to the current, more manual system.
Edmonds said an automated system would have posed a problem in March 2020 for one of the discussion participants because of a “technical issue”.
“I had the keys to the castle at that point in time, and it would’ve been a very bad day” if Ice had declared a default, he said. “It would’ve been cataclysmic at that moment in time . . . We chose to give the appropriate amount of time not to dislocate the market and create a bigger stress.”
Although he did not name the institution in question, several people familiar with the matter have named the party as Citi, which operates one of the largest derivatives clearing brokers on Wall Street, with tens of billions of dollars in customer collateral.
“This matter resulted from a minor technical issue that was quickly resolved,” the bank said in a statement to the FT. “Citi always maintained appropriate funds to meet its obligations.”
Edmonds’ comments came as the industry debated the merits of a proposal by cryptocurrency exchange FTX to apply the automated risk management systems it uses in crypto trading to the highly regulated futures markets.
In traditional markets, clearing brokers collect margin from customers every day and use it to support their open positions. FTX’s plan would replace the intermediary with an algorithm. A shortfall in margin in a customer account would automatically trigger partial sell-offs of positions until they could be covered by the margin available.
Edmonds argued that an automated system would have forced a margin default and human judgment prevented the system from coming under more stress. Edmonds said Ice was able to see that it was a technical issue and gave the institution time to correct the problem.
The CFTC was also notified of Ice’s plan to give the bank time to correct it, according to two people with knowledge of the matter.
Proponents of FTX’s model noted that problems such as Citi’s tech glitch would be addressed by requiring all participants to over-collateralise trades. Still, should margin fall below the required amount, positions would start to be liquidated.
Additional reporting by Gary Silverman in New York