Citi loses two prop traders to hedge fund-sources

* Carpenter, Newton managed a proprietary trading unit

* They leave amid concerns about prop trading regulations

By Steve Eder

NEW YORK, Feb 4 (Reuters) - Two Citigroup Inc (C.N) proprietary traders are leaving the bank for a hedge fund amid concerns that Washington will crack down on proprietary trading at big banks, according to people familiar with the matter.

The traders, Matt Carpenter and Matt Newton, ran a proprietary trading unit for Citigroup, which has been under the thumb of regulators since it received a series of government bailouts.

The pair announced this week that they were resigning, the sources said.

Citigroup declined to comment.

President Barack Obama last month proposed a law that would bar banks from betting in financial markets with their own money, known as proprietary trading.

Called the "Volcker rule," after Obama adviser Paul Volcker, a former chairman of the Federal Reserve, the law aims to prevent banks from taking risks that drag them to the brink of failure.

Carpenter and Newton, and the long-short equity strategy they employed for one of Citigroup's proprietary trading units, would have been affected if Obama's proposals were enacted into law.

Citigroup last year sold off Phibro, its profitable but controversial energy trading operation, when the Obama administration's pay czar sought to block the unit's chief from receiving a $100 million payday. The pay czar, Kenneth Feinberg, was appointed last year to oversee pay at firms like Citigroup that received extraordinary taxpayer bailouts.

Citigroup repaid $20 billion of bailout money to the government in December, in part to reduce the government's say on how the bank pays its employees. Feinberg will not have a say on 2010 compensation at the bank, but the government still has a 27 percent stake in Citigroup, which gives it a say on how the bank is run.

Carpenter spent more than 15 years at Citigroup, working as a managing director and director of U.S. Equity Research.

Newton was a managing director and a former head of single stock trading of U.S. equities at Citigroup markets and banking. (Reporting by Steve Eder; editing by John Wallace)