Citigroup Inc., the third-biggest U.S. lender, will close a proprietary-trading desk that makes bets with the firm's own money and most of the unit's staff will leave before rules banning the practice take effect.
Citigroup is shutting the Equity Principal Strategies business and most staff will leave the bank after Feb. 6, according to a memo by Derek Bandeen, head of equities for the New York-based bank, and obtained by Bloomberg News. Danielle Romero-Apsilos, a spokeswoman for Citigroup, confirmed the memo's contents.
Citigroup Chief Executive Officer Vikram Pandit is closing the unit as regulators draft the so-called Volcker rule, which seeks to restrict banks that accept deposits from trading with shareholders' money. The Citigroup team, led by former Morgan Stanley executive Sutesh Sharma, was partly responsible for equities-trading revenue plunging by $1.3 billion in 2011 compared with the prior year, the bank said last week.
"Pursuant to various regulatory initiatives and changes, we have made the strategic decision to exit the Principal Strategies business," Bandeen said in the memo. "The team, led by Sutesh Sharma, have been aware of this for some time and have worked diligently to wind down the positions over the last few months."
Sharma intends to form a hedge fund, two people familiar with the matter said in August. His Citigroup team managed about $2 billion, one of the people said.
Citigroup holds about $5 billion of shareholders' funds in internal private-equity and hedge funds, a person familiar with the matter said in May. The funds may also be subject to the proposed rule, named for former Federal Reserve chairman Paul Volcker, which would prohibit banks from owning more than 3 percent of such funds and from investing more than 3 percent of Tier 1 capital in the funds.
Citigroup fell less than 1 percent, to $30.30, at 12:59 p.m. in New York trading. The shares gained 15 percent this year through yesterday.
Sharma, who is based in London, worked with Pandit at Morgan Stanley. Sharma became head of global proprietary trading while Pandit rose to lead sales, trading and investment banking.
The pair also worked together at Old Lane Partners LP, the hedge fund Pandit founded after he left Morgan Stanley. Citigroup bought the fund in 2007 for $800 million in a deal that eventually led to Pandit becoming CEO of the bank in December 2007. Some of Sharma and Pandit's other ex-Morgan Stanley and Old Lane colleagues have also worked in the Equity Principal Strategies unit.