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Citibank says memo on European bond market isn''t official policy ....

Section: Daily Dispatches

By Pivi Munter
Financial Times
Monday, January 31, 2005

http://news.ft.com/cms/s/086cefce-73ce-11d9-b705-00000e2511c8.html?
referrer_id=yahoo&ft_ref=yahoo1&segid=03058

Citigroup's huge trades in the eurozone government bond market last
August -- which were later described as "knuckle-headed" by Chuck
Prince, its chief executive -- came shortly after an internal
memorandum spelt out how the US investment bank could "very
profitably" destabilise the market.

The memo, obtained by the Financial Times, outlines a strategy to
shake up the eurozone market, where trading margins have contracted
because of transparency and stiff competition.

The document dated July 20, two weeks before the trades were
conducted, says Citigroup wanted to "turn the European Government
bond market into one that more closely resembles" the less
transparent US Treasury bond market, which is dominated by a much
smaller number of investment banks. "Over time, this may help to kill
off some of the smaller dealers," the memo adds.

On Tuesday, Gianluca Garbi, chief executive of EuroMTS, the company
that runs electronic trading in European government bonds, said he
was "astonished" in response to the FT's report about the memo.

"As a regulated market, we are obliged to get hold of this type of
information and I will be writing to Citigroup today," Mr Garbi told
Dow Jones newswires.

A Citigroup spokesman said on Monday night: "As this is the subject
of regulatory enquiry, we are unable to comment other than to say
this memo is filled with in-appropriate and unrealistic statements.
It was not seen by, nor does it represent the views of, the
supervisors who approved the trade, nor of the firm."

The memo is likely to fuel the indignation of eurozone governments,
many of which have made great strides in lowering their borrowing
costs since the euro's launch six years ago.

It may also weigh against Citigroup in regulatory investigations of
the trades, being led by Bafin of Germany and the UK's Financial
Services Authority.

Entitled "Challenging the dominance of Eurex futures," the Citigroup
document outlines a plan to take advantage of liquidity differentials
between the German government bond [Bund] futures and cash bonds
traded on the EuroMTS electronic system.

"We should be able to exploit this situation in a very profitable
way," the memo says.

Eurex, the Frankfurt-based derivatives exchange, is the most
important trading venue for eurozone government bonds, because its
German government bond futures are used to price all eurozone
government debt.

While trading activity on Eurex fluctuates because of seasonal
factors and economic conditions, liquidity on MTS is much more
constant because the platform obliges its dealers to provide
continuous price quotes.

"When there is a liquidity imbalance ... we drive up the Bund
future [and] then hit out all the cash [bids] on MTS," says the
memo. On August 2 Citigroup stunned the eurozone bond market
by selling 11 billion (7.6 billion) of cash bonds in less
than two minutes. About 30 minutes later, the bank bought back
4 billion of the bonds at lower prices, making a profit of
about 17 million.

The explicit intention to destabilise Eurex futures is likely to
strengthen the hand of German prosecutors, who last week launched a
criminal probe into possible market manipulation.

The memo, apparently written by Simon Wivell of Citigroup's European
government bond trading desk in London, is addressed to Daniel
Leadbetter, another member of the same team.

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