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. A Citigroup spokesman said last 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.
Prince called the guys who wrote this stuff "knuckle-headed." Shades of Enron energy traders. Euro-U.S. relations really seem to be heating up. I assigned a piece on this but got back mostly an internal, Euro-harmonization story. Got to get on it. The best part was how they did it:
?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 ?11bn (�7.6bn) of cash bonds in less than two minutes. About 30 minutes later, the bank bought back ?4bn of the bonds at lower prices, making a profit of about ?17m.