Bank 'regrets' bond trade

Citigroup, the world's largest bank, yesterday said it regretted executing a jumbo trade of European government bonds in August. The trade shook the market and prompted an investigation by financial regulators in the UK and Europe.

"We did not meet our standards in this instance and, as a result, we regret having executed this transaction," wrote Mr Tom Maheras, Citigroup's head of global capital markets, in an e-mail to employees seen by the Financial Times.

Meanwhile, in Tokyo the bank's business practices came under further scrutiny after Japan's securities watchdog said that Citibank's Japanese unit had misled several clients over the sale of structured bonds and called for it to be penalised.

The reputation of the bank has been under pressure since it sold €11 billion of European government bonds on the MTS electronic trading system in less than two minutes on August 2nd, only to buy back €4 billion of bonds at much lower prices half-an-hour later.

Citigroup is thought to have made a profit of about €15 million.

However, the trades upset other banks, which shared a similar amount in losses because they were committed to providing price quotes at restricted bid and offer levels in order to ensure a liquid market for government bonds in Europe.

Treasury officials at some European governments were also annoyed that Citigroup's actions had exposed limitations in the MTS trading system that could lead to a decrease in market liquidity and subsequently raise the cost of borrowing.

Maintaining a good relationship with governments is seen as being crucial for investment banks if they are to win lucrative mandates for bond sales and equity issues from privatisation processes. "Citigroup is committed to holding itself to the highest standards in its business practices," wrote Mr Maheras.

"Unfortunately, we failed to fully consider the \ impact on our clients, other market participants and our regulators," he added.

Mr Maheras said the bank was co-operating fully with the UK's Financial Services Authority and European regulators which are investigating the transaction.