One of the largest penalties for system breaches, UK authorities penalised Wall Street giant Citigroup 61.6 million pounds ($78.5 million) for control shortcomings in its trading activities. In one instance, the Wall Street firm caused a precipitous collapse in European equities.

The markets regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), both looked into and penalised Citigroup for the shortcomings that occurred between April 2018 and May 2022, they said in a statement on Wednesday summarising the investigation’s conclusions.

Citigroup Global Markets Limited (CGML), the bank’s London division, experienced a number of shortcomings that “crystallised into trading incidents,” the most notable of which was an incorrect $444 billion transaction in May 2022.

“Firms involved in trading must have effective controls in place in order to manage the risks involved,” said Sam Woods, CEO of the PRA and the Bank of England’s deputy governor for prudential regulation. “CGML failed to meet the standards we expect in this area, resulting in today’s fine.

The authorities’ findings indicate that on May 2, 2022, Citi processed a $444 billion transaction that was intended to be for just $58 million. This led to $1.4 billion in erroneous sell orders. A trader’s error, referred to as a “fat-finger” error, was the direct source of the trading blunder, according to the PRA, but “primary control failings” caused Citi’s computerised trading system to generate erroneous orders.

Prior to the deal being cancelled, the regulator stated that the error occurred “with a material short term movement” in multiple European indexes.

“In particular the absence of certain preventative hard blocks and the inappropriate calibration of other controls” were behind the blunder, it said.

The PRA had sent Citi “repeated supervisory communication” to help it become better, but flaws remained, the regulator said. Citi’s own systems had also found issues, and a number of instances had brought attention to the issues.

“We are happy to resolve this matter from more than two years ago, which arose from an individual error that was identified and corrected within minutes,” a Citi spokeswoman said.

The representative sent out an email stating, “We immediately took steps to strengthen our systems and controls, and remain committed to ensuring full regulatory compliance.”

Under the leadership of CEO Jane Fraser, Citi has been working to rectify pervasive and long-standing issues with its internal controls, data governance, and risk management.

The Federal Reserve and the Office of the Comptroller of the Currency have issued regulatory notifications in the US as a result of the shortcomings.

A “hard block,” which occurs when the system stops a deal from proceeding after a specific threshold is reached, was the primary method used by Citi in London to stop a trader from entering a mistake. However, the PRA noted that there weren’t enough of these in Citi’s order management system in Europe and that the company’s identical trading desk in New York had hard blocks that would have stopped the transaction from being processed.

The PRA said that out of the 711 notifications created by the order on May 2, 2022, 65 were hard blocks and the remaining alerts were “soft blocks” that traders may overcome. Those alerts were overruled that day.

Additionally, Citi did not adequately monitor the deals that resulted in alerts and bans. Its algorithmic approach, which PRA described as the “first line of defence,” missed them, which is why. Then, due to employee absences, a different Citi monitoring team was compelled to transfer oversight to another team; however, the replacement team did not respond to the alarms.

“It was in fact the trader who discovered the error and cancelled the order, approximately 15 minutes after they had entered the order. Consequently, the risk management function providing real-time monitoring of the Firm’s trades was ineffective,” the PRA said.

For deficiencies in its trading systems and controls, the PRA fined Citi 33.9 million pounds; however, this payment was lowered by 30% once Citi consented to fix the problem.

(Adapted from CNN.com)