Citigroup Global Markets Inc (CGMI) has agreed to pay a fine of $1,400,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).

Beginning in October 2012, CGMI failed to collect initial and maintenance margin on OTC equity option contracts it entered into with two affiliated entities. Prior to this time, CGMI calculated margin requirements for OTC equity option contracts with a manually created report.

The firm discontinued using the report in September 2012 during a change in management of the firm’s Margin Operations team. As a result, CGMI had no process to calculate or collect initial or maintenance margin on OTC equity option contracts entered into with the two affiliated entities until March 2021 when the firm resumed manually calculating margin requirements after discovering its failure to calculate margin.

After self-identifying the failure and the issues described herein in February 2021, CGMI initiated remediation, conducted an internal investigation, and shared the results of that investigation with FINRA. In May 2022, CGMI implemented an automated process to calculate margin for OTC equity options entered into with the two affiliated entities.

CGMI’s failure to collect margin on OTC equity option contracts it entered into with one affiliated entity resulted in a margin deficiency for most dates in a sample period of March 2020 through end of May 2020, ranging from approximately $16 million to approximately $2.2 billion.

CGMI’s failure to collect margin on OTC equity option contracts it entered into with the other affiliated entity resulted in margin deficiencies for nine of the dates in the sample period, ranging from approximately $1 million to approximately $81.1 million.

On other dates in the sample period, there were no margin deficiencies. CGMI had sufficient net capital on all dates sampled.

CGMI’s failure to collect the required margin on OTC equity options conferred a benefit to the firm’s affiliates in that they were not required to deposit additional cash or securities.

Based on the foregoing, CGMI violated FINRA Rules 4210 and 2010.

From October 2012 through March 2021, the OTC equity option contracts executed for CGMI’s affiliated entities improperly occurred in cash accounts. Further, by failing to collect margin on the OTC option transactions held in those accounts, CGMI improperly extended credit to the affiliated entities associated with the options trading.

Therefore, CGMI violated Exchange Act § 7(c), Section 220.8 of Reg T and FINRA Rules 4210 and 2010.

From October 2012 to March 2021, CGMI’s failure to collect margin from its affiliated entities caused the firm’s net capital calculations to be inaccurate. By not deducting the margin deficiencies from its net capital computations, CGMI overstated its reported net capital. During the sample period of March through May 2020, CGMI overstated its net capital by as much as $2.2 billion. CGMI had sufficient net capital on all dates sampled.

Therefore, CGMI violated Exchange Act § 15(c)(3), Exchange Act Rule 15c3-1(c), and FINRA Rule 2010.

From October 2012 through March 2021, CGMI inaccurately calculated its aggregate indebtedness and net capital by not accounting for margin deficiencies associated with OTC equity option contracts with its affiliated entities. As a result, the firm’s general ledger and computations of aggregate indebtedness and net capital were inaccurate.

In addition, FOCUS reports filed by CGMI during this period contained inaccurate computations of net capital.

Therefore, CGMI violated Exchange Act § 17(a)(1), Exchange Act Rules 17a-3 and 17a-5, and FINRA Rules 4511 and 2010.

On top of the $1.4 million fine, the firm has agreed to a censure.