Citigroup Prop. Traders Could Move To Hedge Fund Unit

Jul 28 2010 | 2:26pm ET

Citigroup is mulling whether to take advantage of a loophole in the Volcker rule to hold on to its proprietary traders.

The recently passed Dodd-Frank financial regulation reform law bars bank holding companies from proprietary trading. As originally written, the same Volcker rule would have also barred banks from owning, investing in or sponsoring hedge funds and private equity funds. But after much wrangling, the latter provisions were seriously watered down, allowing banks to hold on to their hedge funds, although barring them from investing more than 3% of their capital in them.

Given those restrictions, Citi has spoken with traders in its Citi Principal Strategies group about whether they’d like to be transferred to its hedge fund unit, Citi Capital Advisors. Under that plan, the bank would seed hedge funds for the traders and then raise outside capital, allowing it to redeem its initial investments, Bloomberg News reports.

Citi is also evaluating whether its prop. traders have posted strong enough track records to attract outside investments. Principal Strategies chief Sutesh Sharma has spoken with Citi Capital Advisors chiefs Jonathan Dorfman and James O’Brien about the options.

Citi might also simply transfer the prop. traders to its main client trading desks. But it is unclear that such an opportunity would entice the traders.

Banks have four years to come into compliance with the provisions of the Volcker rule.

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