Citigroup suffered a technology glitch at the height of the coronavirus market panic that meant it had to rely on the mercy of an exchange clearing house to keep the bank from defaulting on margin payments on derivatives contracts.
According to several people familiar with the matter, the bank had a payment technology issue that resulted in it being late in taking a margin call from a US clearing house operated by Intercontinental Exchange in March 2020.
Derivatives executives told the FT that malfunctions resulting in missed margin calls are 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 start of the pandemic.
The technology snafu has been one of several at Citigroup in recent years. U.S. 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 Citi’s customer Revlon’s lenders in lieu of the intended interest payment of less than $8 million. This year erroneous trades on European stocks were placed by a trader at the bank, resulting in a mini flash crash.
Ice’s chief development officer, Chris Edmonds, alluded to the March 2020 glitch during a May 25 roundtable convened by US regulators in Washington to discuss whether automated risk management in the leveraged futures markets should to the current, more manual system.
Edmonds said an automated system presented one of the panelists with a problem in March 2020 because of a “technical issue.”
“I had the keys to the lock at that point, and it would have been a very bad day,” he said if Ice had declared default. “It would have been catastrophic at that point. . . We have chosen to allow the appropriate amount of time so as not to confuse the market and create greater stress.”
Although he did not identify the entity in question, several people familiar with the matter have identified 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 small technical issue that was quickly resolved,” the bank said in a statement to the Financial Times. “Citi has always maintained adequate funds to meet its commitments.”
Edmonds’ comments came as the industry debated the merits of a proposal from cryptocurrency exchange FTX to apply the automated risk management systems it uses in crypto trading to the heavily regulated futures markets.
In traditional markets, clearing brokers collect margin from clients every day and use it to support their open positions. FTX’s plan would replace the mediator with an algorithm. A margin shortfall on a client account would automatically trigger partial sales of positions until they could be covered by available margin.
Edmonds argued that an automated system would have forced a margin default and human judgment would have prevented the system from being subjected to more stress. Edmonds said Ice recognized it was a technical issue and gave the institution time to fix the problem.
The CFTC was also briefed on Ice’s plan to give the bank time to rectify this, according to two people familiar with the matter.
Proponents of the FTX model point out that issues like Citi’s technical glitch would be addressed by requiring all participants to over-hedge trades. Should the margin nevertheless fall below the required amount, the positions would be liquidated.
Additional reporting by Gary Silverman in New York
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