Citigroup Closes Exclusive Credit Program Following Swiss Franc Losses
‘Alternative Credit Program’ clients were fast-tracked through less intensive version of bank’s normal credit checks
Citigroup Inc. has closed down a little-known program that allowed a small group of coveted clients to make high-stakes bets on currency markets without going through the bank’s normal procedures to manage risk, according to people familiar with the matter.
The bank closed the “Alternative Credit Program,” which existed since 2007, soon after asharp move in the Swiss franc in January left Citigroup and some clients facing big losses, these people said.
About 40 clients signed up to ACP, including hedge funds and offices managing wealthy families’ money, people familiar with the program said. These clients, who were allowed to use credit to amplify their currencies bets, were fast-tracked through a less intensive version of the bank’s normal credit checks, the people said. There were other safeguards built into ACP and clients in the program were typically seen as having a relatively low credit risk with a strong track record in trading currencies, the people said.
Analysts, consultants and bankers from other firms said Citigroup’s program was unusual in the industry. People familiar with ACP said that its streamlined credit-approval process helped attract clients to Citigroup from other major global banks.
Javier Paz, a senior consultant with Aite Group, said that while it isn’t uncommon for banks to offer high-value clients different terms and “something warm and fuzzy to get the business done,” he doesn’t know of a direct counterpart to ACP at other banks. Mr. Paz was told of the ACP program by The Wall Street Journal.
Other major global banks don’t have a similar program to ACP, according to people familiar with the matter.
Citigroup’s decision to shutter ACP followed a dramatic shift in Switzerland’s currency in January. Many traders, banks and hedge funds were caught out when the franc soared 40% in one day after the country’s central bank scrapped a long-standing cap on the value of the currency against the euro. Citigroup was among the biggest losers, hit with about $150 million of losses related to the surprise currency movement, according to people familiar with the matter.
It isn’t known how much of Citi’s estimated losses relate to the bank’s own trading book and how much to clients’ losses.
Meanwhile, the bank is trying to recover some of its Swiss franc losses from clients, including at least one that was formerly in ACP. In March, Citigroup sued Tormar Associates LLC, a Connecticut-based fund owned by former Goldman Sachs Group Inc.partners Ron Marks and John Tormondsen, alleging the fund owes it more than $25 million. The bank said Tormar failed to post additional capital when the value of its currency portfolio fell on the Swiss franc move. Tormar responded with a counterclaim filed in April that alleges Citi’s “panicked and improper conduct” led to unnecessary losses for both parties.
The case is pending in the U.S. District Court of the Southern District of New York.
Citigroup issued a court filing in response to the counterclaim Wednesday in which it said Tormar’s claim is “a complete distortion of the events” and “completely irrelevant to the legal issues at stake.”
Tormar was signed up to ACP in 2009, according to emails between the bank and Tormar reviewed by the Journal. Emails show that Citigroup’s sales managers told the fund that they planned to “fast track” Tormar into the program and that Tormar was “a perfect fit” as long as it didn’t trade South African rand or New Taiwan dollars, which were considered riskier currencies because they are less liquid than some major currencies.
Most of Citigroup’s former ACP clients have been redirected to the bank’s broader prime brokerage unit, and subjected to new credit checks, people familiar with the matter said. Accounts of some former ACP clients have been closed, the people said. Citigroup’s prime brokerage unit has also increased the amount of collateral required to trade currencies by about 25%, one of these people said.
Source: WSJ – Citigroup Closes Exclusive Credit Program Following Swiss Franc Losses
