Citigroup Inc said in a letter to the U.S. securities regulator it had unintentionally classified as much as $9.2 billion of repurchase agreements as sales at one point, when they should have been shown as borrowings.

In its letter dated April 13 to the U.S. Securities and Exchange Commission (SEC), which was made public on Thursday, Citi said the third quarter of 2009 had the largest amount of repurchase agreements accounted for as sales.

Repurchase agreements or repos are a form of financing that allows a borrower to opt for cash loans upon submitting the requisite financial securities as a collateral to the lender. The borrower would then buy back the collateral from the lender at a later date to close out the loan.

Classifying repo transactions as a sale instead of showing it as borrowings would mask the true leverage position of a company as the assets would be removed from the balance sheet.

The repo controversy was brought into focus when a U.S. court appointed examiner charged bankrupt investment bank Lehman Brothers Holdings Inc for classifying certain repo transactions as sales.

This move by Lehman removed some $50 billion in assets from its balance sheet in 2008 presenting a stronger financial picture than existed, according to the examiner's report.

The SEC said in March it had made inquiries of about two dozen financial firms to determine whether their repo activities over the past few years had been similar to those of Lehman.

Citigroup said the repo agreements qualifying for sales accounting were primarily done its Japanese and U.K. broker-dealers unit. Citibank in North America accounted for fewer transactions.

The amount of repurchase agreements accounted for as sales by the U.K. broker-dealers during 2007 to 2009 did not exceed $9.2 billion at any quarter-end date, Citi said.

The amount accounted for less than half a percent of Citigroup's total assets, according to the bank.

We believe a process defect may have arisen during the automation of internal Citi margining systems and the restructuring of our operations department resulting in Citi's unintentionally collecting variation margin on certain of these transactions, it said.

Citi said the repurchase agreements and securities lending transactions accounted for as sales were not material to its financial condition.

Also, the practice did not alter its results of operations, revenue or liquidity, the bank said in its letter.

(Reporting by Sakthi Prasad in Bangalore; Editing by Valerie Lee)

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