Banking & Finance

Citigroup faces US$180 million loss on loan to Asian hedge fund

  • Eventual losses may be smaller depending on how trades are unwound, say sources
PUBLISHED : Wednesday, 19 December, 2018, 10:09am
UPDATED : Wednesday, 19 December, 2018, 10:09am

Citigroup faces losses of as much as US$180 million on loans made to an Asian hedge fund whose foreign exchange wagers have gone awry, prompting board level discussions and a business shake-up, according to a person briefed on the matter.

The hedge fund and Citigroup are in discussions on the positions and how they should be valued, said people with knowledge of the talks, who asked not to be identified because the discussions are private. The situation is fluid and the eventual losses may end up being smaller depending on how the trades are unwound, one of the people said.

The matter was escalated to Citigroup’s board, one person said. The bank is also reorganising its prime brokerage business as a result of the expected financial hit, the person said. It is taking the foreign exchange prime brokerage unit out of its currency trading division and placing it under the oversight of its prime finance and securities services unit, according to a memo from the bank.

Chris Perkins, who leads the bank’s over-the-counter clearing business, will become head of the foreign exchange prime brokerage, the company said in the memo on Tuesday. Sanjay Madgavkar, who ran the foreign exchange prime brokerage unit and has worked at Citigroup for more than 20 years, is leaving the firm, the person said. Madgavkar declined to comment, as did Scott Helfman, a spokesman for the New York-based lender.

The episode shows that banks are beginning to feel some of the pain that has besieged the hedge fund industry this year as geopolitical tensions around the world have spurred dramatic swings in asset prices. The US$3.2 trillion industry is on track to post its worst performance since 2011, and hedge funds with a focus on Asia are struggling in particular.

The Citigroup chief financial officer, John Gerspach, said this month momentum in rates and currencies trading had not carried over from the third quarter and the firm was likely to post a year-over-year decline in fixed-income trading revenue this quarter.

The reorganisation comes as Citigroup has been expanding its prime finance business, which is a part of its equities trading division and helps hedge funds in borrowing stocks, funding, transactions and risk management. At the firm’s investor day last year, Citigroup said it had increased balances from prime brokerage clients by 40 per cent since 2014 and noted its revenue growth in the business doubled that of its Wall Street peers.

But lending through the prime brokerage can bring the risk of large swings in revenue. The firm said in July 2015 it would take a US$175 million charge from prime finance when it cut the value of collateral underlying loans to facilitate customer trading activity. Three months later, the lender reversed US$140 million of the valuation adjustment.