Citigroup Said to Drop Hedges Week Before Loss on Swiss Turmoil

(Bloomberg) — Citigroup Inc.’s loss on a surge in the Swiss franc this month was exacerbated by the bank’s decision to let protections against currency swings lapse a week earlier, according to people with knowledge of the situation.

The bank didn’t renew derivatives trades that would have blunted the impact from Switzerland’s surprise move to let the franc rise, said the people, who asked not to be identified discussing the strategy. The company’s losses exceeded $200 million in the hours after the announcement, before traders pared the deficit to closer to $150 million, the people said.

The loss at Citigroup, which dethroned Deutsche Bank AG last year as the world’s biggest foreign-exchange dealer, illustrates the perils of unhedged trading in the currency markets. Citigroup has faced particular scrutiny of its ability to manage risks after soured mortgage holdings forced it to draw more taxpayer support than any U.S. bank during the financial crisis.

Citigroup was exposed after selling options on the Swiss franc to customers and failing to renew offsetting hedges, according to one of the people. The options gave buyers the right to collect from a strengthening franc and from higher volatility. While the derivatives desk lost money that day, the spot currency desk turned a profit, one person said.

Competitors including JPMorgan Chase & Co., which was said to reap $300 million on the franc’s move, had largely kept their safeguards in place, two people said.

Market Turmoil

It can be expensive to hedge a large position. During last year’s second quarter, Citigroup’s equity-trading revenue was cut by about $100 million because of the cost of protecting itself against market turmoil, tied to the unrest in Ukraine, that never materialized.

While the expiration of hedges contributed to the losses, a greater portion came from customer trading, said Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup.

“As a result of our role in making markets and facilitating trades for clients, Citi experienced a modest loss,” she said in a statement. “Expiration of hedges related to the franc did not drive the shortfalls in our trading activity, all of which was executed under our existing rigorous risk management limits and supervision.”

Citigroup risk managers were aware that the firm’s hedges hadn’t been replaced, one of the people with knowledge of the strategy said. They expired about a week before the Swiss central bank’s decision, another person said.

FX Flow

Chirag Patel, global head of foreign-exchange flow options, and Roland Jeurissen, a senior forex-options trader who joined Citigroup in 2009 from BNP Paribas SA, were responsible for managing the portfolio’s risk, one person said.

The foreign-exchange and local markets unit has been run globally by Nadir Mahmud since Anil Prasad departed last year. James Bindler took over the global foreign-exchange business from Jeff Feig, who joined Fortress Investment Group LLC in 2014 to co-lead the firm’s macro strategy. Sanjay Madgavkar, who also reports to Mahmud, is global head of the foreign-exchange prime brokerage, which counts wounded retail brokerage FXCM Inc. as a client.

Patel didn’t respond to a phone message and Jeurissen didn’t return an e-mailed request for comment. Romero-Apsilos declined to comment on their behalf.

Citigroup Chief Financial Officer John Gerspach sought to reassure analysts last week when questioned about the franc’s swing.

Policy Change

“Since that event, we’ve seen good activity levels from our customers in the FX markets,” he said on a conference call. “We’re going to continue to work closely with our clients to help them manage their currency needs.”

The Swiss central bank gave little public indication it was considering a policy change. On Dec. 18, Swiss National Bank President Thomas Jordan said officials stood ready to further intervene in currency markets to counter a strengthening franc. On Jan. 13, SNB Vice President Jean-Pierre Danthine re-affirmed the currency cap as a “pillar of our monetary policy.”

Two days later, officials sprang the surprise announcement, roiling the currency markets.

Citigroup reported an average foreign-exchange value-at- risk, a measure of how much it could lose in one day of trading, of $32 million in the third quarter, according to a regulatory filing. It has yet to release the fourth-quarter document.

To contact the reporters on this story: Julia Verlaine in London at [e-mail]; Dakin Campbell in New York at [e-mail] To contact the editors responsible for this story: Peter Eichenbaum at [e-mail] David Scheer