A team of Citigroup Inc. derivatives traders generated about$300 million of revenue this year, thriving from serving companiesand investors trying to anticipate central bank decisions,according to people with direct knowledge of the matter.

The windfall was produced by the bank's U.S. dollarinterest-rate swaps desk led by Geoff Weber in New York, accordingto the people, who asked not to be identified because the firmdoesn't break out results for such businesses. The group includesDan Leadbetter, Daniel Gottlander and Mark Zaguskin, one personsaid.

The team's performance demonstrates that traders can still makeoutsize profits even after regulators sought to curb risk-taking inthe wake of the financial crisis. Another example: Goldman SachsGroup Inc. trader Thomas Malafronte earned more than $100 millionby scooping up cheap junk debt early this year.

The Volcker Rule, named for former Federal Reserve Chairman PaulVolcker, seeks to make the financial system safer by barring bankswith federally insured deposits from betting their own money. Suchwagers once drove epic profits — and bonuses — in the years beforethe crisis.

Now traders are largely relegated to the business of helpingcustomers buy and sell securities, profiting on the spread andmovement in prices. But the line between that business andspeculating on prices by holding positions for days or weeks can beblurry.

Malafronte bought high-yield bonds from clients eager to selland later found other buyers, according to a person with knowledgeof the matter. The Wall Street Journal reported on his performancelast week.

A Citigroup spokesman, Scott Helfman, declined to specifyWeber's gains.

“Over the last several years we have been investing in our NorthAmerican rates business to better serve our customers, and we arenow seeing positive results,” Helfman said.

Some of Weber's success stems from volume, as the bank's globalfootprint gives it a presence in dozens of countries and visibilitywith thousands of clients. The bank has also invested intechnology, enabling it to handle a large number of transactions ina short amount of time, the people said. Wall Street trading desksare turning to scale to generate revenue by processing more andmore transactions with smaller profit margins.

'Good Person'

Citigroup hired Weber from UBS Group AG in 2012, and in Januaryexpanded his responsibilities to include both Treasuries anddollar-swaps trading.

“Given the regulatory backdrop, he's a good person to have inthat seat,” said Nick Brophy, the former head of U.S interest-ratetrading who brought Weber to Citigroup. “He is a classic marketmaker, anxious to see trades and make markets. And clients likethat. So it wouldn't surprise me if they were picking up marketshare.”

Citigroup's broader U.S. interest-rate business, overseen byDeirdre Dunn, ranked second in the U.S. in a 2016 survey byGreenwich Associates. Her operations — which also handleTreasuries, bonds backed by government agencies and options —generated more than $800 million of revenue this year, according toone of the people. Weber is among the traders and salesmen inDunn's division.

Since the financial crisis, most interest-rate swaps arerequired to be traded on so-called swap-execution facilities andthen backed by a clearinghouse. The platforms allow derivatives tobe traded electronically with the hope of increasing pricetransparency. Most of the trading is done in an auction, andinvestors are increasingly favoring banks or other market-makersthat don't change the price during the time it takes to execute thetrade. Ensuring they are processed without mistakes is alsovital.

Citigroup's trading volumes got a boost in the third quarter asinvestors adjusted portfolios around Fed officials' differingpublic pronouncements about the outlook for interest rates, ChiefFinancial Officer John Gerspach said Oct. 14, when the companyannounced third-quarter profit that beat analysts' estimates. Thestock has climbed 3% since then, paring the year's decline byhalf.

Weber's team also has been minting revenue tied to the bank'shandling of corporate bond deals by working with clients issuingthe debt, according to the people. In such cases, companiestypically sell debt to investors with a fixed interest rate, thenenter a contract with the bank to pay a variable rate.

While Citigroup has held its No. 3 rank among U.S.investment-grade bond underwriters this year, it has beentightening the gap with industry leaders JPMorgan Chase & Co.and Bank of America Corp., according to data compiled by Bloomberg.Citigroup increased its share of that market to 10.2% this yearthrough Wednesday, up from 9.9% last year. Top-ranked JPMorgan'sshare slid to 12% from 13.5%.

Revenue at Citigroup's broader fixed-income trading businessincreased 10% in the first nine months of this year, helped by a35% jump in the third quarter. It rose 19% at JPMorgan this yearthrough September and slipped about 6% at Goldman Sachs.

Citigroup's revenue from interest-rate and currency tradingincreased more than 30% in the third quarter from a year earlier,with “particular” strength in G-10 rates, Gerspach said. Thatreflected “strong client activity and a more favorableenvironment,” he said.

Bloomberg News

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