Citigroup Becomes the Latest Bank to Shutter Its Prop Trading Desk as Volcker Rules Loom

Citigroup reportedly plans to close a proprietary-trading desk, with most of the unit’s staff leaving before new rules banning prop trading even take effect. In fact, regulators are still arguing over a final draft of the rules, which were named after former Federal Reserve Chairman Paul Volcker and are part of the huge Dodd-Frank Act and not due to take effect until July. The rules would restrict banks that accept deposits from trading with shareholders’ money on their own behalf.

The bank is shutting down its Equity Principal Strategies business and most staff will leave the bank next week (Feb. 6), according to a memo from Derek Bandeen, head of equities at Global Equities Trading at Citigroup, that was obtained by Bloomberg. Danielle Romero-Apsilos, a spokeswoman for Citigroup, confirmed the memo’s contents, Bloomberg stated.

The Citigroup team, led by former Morgan Stanley (MS) executive Sutesh Sharma, was partly responsible for equities-trading revenue plunging by $1.3 billion in 2011 compared with the prior year, the bank stated earlier this month. “Pursuant to various regulatory initiatives and changes, we have made the strategic decision to exit the Principal Strategies business,” Bandeen said in the memo obtained by Bloomberg.

It went on to say: “The team, led by Sutesh Sharma, has been aware of this for some time and has worked diligently to wind down the positions over the last few months.”

Sharma has been making plans to start his own hedge fund, a person familiar with his plans told the New York Times. Last year, he registered a British fund called Portman Square Capital.

Citigroup is one of many Wall Street firms to exit the proprietary trading business ahead of the Volcker Rules. The proprietary trading group at Goldman Sachs left the bank in October 2010 to start a similar operation at Kohlberg Kravis Roberts, the private equity giant, says New York Times Dealbook reporter Kevin Roose.

“JPMorgan Chase moved its proprietary desk out of its investment bank and into its asset management unit last year, and Morgan Stanley has said it will spin its proprietary operation into a separate entity later this year,” Roose writes, adding that some of those banks still have ownership stakes in their own hedge fund and private equity businesses. Under the proposed rules, they are required to bring those stakes down to 3 percent or less.

Citigroup’s remaining stake in its Citi Capital Advisors unit is roughly 5 percent and will be brought down further to comply with the rules, according to Roose’s source.