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China said to probe local firm over trading losses that hit Citi

One of China's biggest brokerages is being probed by the nation's securities regulator after suffering large trading losses that also wound up hitting Citigroup Inc., people with knowledge of the matter said.

The losses at GF Holdings (Hong Kong) Corp., owned by Guangzhou-based GF Securities Co., stem from foreign-exchange wagers by one of its hedge funds, the people said. Those trades also ensnared Citigroup, which in December was said to face as much as $180 million of losses on a loan to the hedge fund.

GF Securities, China's fifth-largest securities firm by revenue, in January cited "operational risks" as the reason behind a decision to cut compensation costs for 2018. It didn't say whether the move was related to the trading losses at the Hong Kong unit. The fourth quarter was brutal for Chinese brokerages, with the Shanghai Composite Index suffering its biggest quarterly drop in almost three years.

GF Securities informed the China Securities Regulatory Commission that month that its Hong Kong unit had suffered large losses, prompting the watchdog to ask for more information about the incident, including whether there had been any shortcomings in risk controls, one person said. The CSRC continued to press GF Securities for additional details after the Lunar New Year holidays in early February, the person said.

It isn't clear whether the CSRC plans to take any disciplinary action. The regulator didn't respond to a faxed request for comment. GF Securities didn't return calls seeking comment.

Established in 1991, GF Securities has about 12,000 employees spread across brokerage, investment banking and asset management operations. The firm is listed on stock exchanges in Shenzhen and Hong Kong.

CITIC Securities Co. tried to buy the company in 2004 in part because of its strong presence in Southern China, but the deal failed.

GF Holdings has four wholly owned subsidiaries, according to its website:

  • GF Securities (Hong Kong) Brokerage Ltd.
  • GF Capital (Hong Kong) Ltd.
  • GF Asset Management (Hong Kong) Ltd.
  • GF Investments (Hong Kong) Co.

GF Holdings is separate from GF Fund Management Co., another unit of GF Securities.

Citigroup was reorganizing its prime brokerage business as a result of the incident, people familiar with the matter said in December. The eventual losses for the New York-based bank may end up being smaller, depending on how the trades are unwound.