Citi penalized by BaFin Germany for 2022 crash blunder, to the tune of $13.9 million
In a series of incidents, Citigroup (Citi) has faced regulatory action and significant fines due to errors in its algorithmic trading operations.
In August 2020, a Citi employee transferred roughly $900 million to Revlon's creditors ahead of schedule, a mistake attributed to another manual error. This error did not go unnoticed, as the German financial watchdog, BaFin, fined a Citi subsidiary, Citigroup Global Markets Europe, nearly €13 million ($13.9 million) for control failures in its algorithmic trading operations.
Fast forward to May 2022, when a Citi trader created a $444 billion basket of equities instead of $58 million due to a manual error. Despite Citi's controls, $189 billion in shares were sent to a trading algorithm, leading to a flash crash in European stock markets in 2022. The bank was fined $400 million, likely in part due to the Revlon blunder.
Germany’s Securities Trading Act (Wertpapierhandelsgesetz, WpHG) mandates that firms engaging in algorithmic trading comply with MiFID RTS 6 standards. These regulations emphasize comprehensive governance, rigorous testing, defined risk controls, and effective market abuse surveillance to manage risks associated with automated trading systems.
BaFin asserted that Citi violated the German Securities Trading Act due to inadequate systems and risk control measures. Citi acknowledged the matter, stating it was due to an individual error that was identified and corrected within minutes. However, despite outsourcing its monitoring and management system for algorithmic trading to a London-based unit, Citigroup Global Markets Europe was still responsible for appropriately designing its trading system to detect manual errors.
Two British regulators had fined the bank £61.6 million ($78.4 million) for the same instance two days prior. The Federal Reserve and the Office of the Comptroller of the Currency issued consent orders to Citi, requiring improvements in risk management, data, and internal controls.
These failures led to a lengthy court battle. The incidents highlight potential issues with Citi's manual trading and transfer systems and suggest increased scrutiny of Citi's risk management and control measures. This is not the first "fat-finger error" attributed to Citi's manual output system, raising concerns about the bank's compliance with regulatory standards.
Citi, however, has emphasized its commitment to ensuring full regulatory compliance and has taken steps to strengthen its systems and controls in response to these incidents. The bank continues to work closely with regulators to address any concerns and improve its risk management practices.
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