Citigroup tech glitch revealed during March 2020 market tensions

Citigroup suffered a technology glitch at the height of the market panic over the coronavirus that left it relying on the grace of a clearing house to prevent the bank from defaulting on margin payments for derivatives contracts.

The bank had a problem with payment technology which meant it was late to respond to a margin call from a US clearing house operated 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 are rare but not unheard of. The incident highlighted just how strained the financial system was during the market sell-off at the start of the pandemic.

The tech snafu was one of many at Citigroup in recent years. US regulators fined Citi $400 million in October 2020 for “longstanding deficiencies” in its risk and control systems.

In the summer of 2020, a so-called fat finger error resulted in the repayment of a $900 million loan to the lenders of Citi’s client, Revlon, instead of the scheduled interest payment of less than $8 million.

This year, erroneous trades were placed by a trader at the bank on European stocks, causing a mini-flash crash.

Chris Edmonds, Chief Development Officer of Ice, hinted at the March 2020 problem during a May 25 roundtable hosted by US regulators in Washington on whether to allow automated risk management in markets to term leveraged, as opposed to the current, more manual system.

Edmonds said an automated system caused a problem in March 2020 for one of the chat participants due to a “technical glitch”.

“I had the keys to the castle at the time, and it would have been a really bad day” if Ice had declared a default, he said. “It would have been cataclysmic at that time. . . We have chosen to give the necessary time so as not to upset the market and create greater stress.

Although he did not name the institution in question, several people familiar with the matter named the Citi party, which operates one of the largest derivatives clearing brokers on Wall Street, with tens of billions of dollars in customer warranty.

“This matter was the result of a minor technical issue which was quickly resolved,” the bank said in a statement to the FT. “Citi has always maintained adequate 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 markets at highly regulated term.

In traditional markets, clearing brokers collect margin from clients daily and use it to support their open positions. FTX’s plan would replace the middleman with an algorithm. A margin shortfall on a client account would automatically trigger partial positions liquidations until they could be covered by available margin.

Edmonds argued that an automated system would have forced a margin default and that human judgment would have prevented the system from experiencing more stress. Edmonds said Ice could see it was a technical issue and gave the institution time to correct the problem.

The CFTC has also been made aware of Ice’s plan to give the bank time to fix it, according to two people with knowledge of the matter.

Proponents of FTX’s model noted that issues such as Citi’s technology problem would be solved by requiring all participants to over-collateralize transactions. However, if the margin fell below the required amount, the positions would start to be liquidated.

Additional reporting by Gary Silverman in New York

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