CitiGroup Takes $150 Mln Hit After Letting Swiss Franc Hedges Expire

The world's largest currency dealer allowed its hedging mechanisms to lapse and took heavy losses when the Swiss central bank lifted its currency peg against the Euro.

MOSCOW, January 31 (Sputnik) – The biggest loser in the currency market turmoil caused by the Swiss franc on January 15, was Citigroup Inc., which added to its woes by allowing its currency hedges to expire a week before, which would have lessened its impact, sources familiar with the bank's dealings told Bloomberg on Friday.

"Citigroup was exposed after selling options on the Swiss franc to customers and failing to renew offsetting hedges," reports Bloomberg, explaining that "the options gave buyers the right to collect from a strengthening franc and from higher volatility."

Citigroup told the agency in a statement that the lapse in its hedges contributed to its losses, which totalled $200 million immediately after the move by the Swiss National Bank, but that its traders managed to mitigate these losses slightly, to $150 million. The main force behind the initial loss was customer trading.

"As a result of our role in making markets and facilitating trades for clients, Citi experienced a modest loss," said spokeswoman Danielle Romero-Apsilos. "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."

The Wall Street Journal reported that several other financial institutions suffered substantial losses due to the franc's volatility. Deutsche Bank, which until it was bumped into second place last year by Citi was the world's biggest currency broker, also lost a reported $150 million, while Barclays lost tens of millions of dollars. According to the Wall Street Journal, major foreign exchange broker FXCM had to be bailed out via an emergency $300 million loan from investment firm Leucadia National Corp, with an initial interest rate of ten percent.

However, a source close to investment bank JPMorgan Chase told the newspaper that the bank made between $250 and $300 million in gains on January 15 after filling client orders at a rate of 1.02 francs per euro, at a time when the franc strengthened from 1.20 francs per euro to nearly 0.85.

On January 15 the franc soared by around 30 percent against the euro after the SNB shocked financial markets by abandoning the cap on its currency, according to which one euro had been pegged at 1.20 francs since September 2011. In a day of trading which one trader described to the BBC as "carnage," the franc rose as high as 0.81 per euro immediately after the SBN move, although it subsequently settled at 1.04 euros.