The Hong Kong Securities and Futures Commission (SFC) has reprimanded and fined the brokerage arm of global financial institution HK$18.5 million over internal control failures in relation to

1. conflicts of interest,
2. insufficient documentation of its electronic trading systems,
3. reporting failures in relation to short selling orders and large open positions, and
4. breach of position limits.

anctions were the result of a settlement agreement between the SFC and the firm.

In particular, during the relevant period, the firm’s agency execution function and principal trading function were not segregated, contrary to regulatory requirements. The SFC found that traders at the firm who executed client orders had also traded those particular stocks on a principal basis. In addition, the firm was found to have placed undue reliance on its traders to ensure compliance with position limits.

A copy of the SFC’s press release is available: http://bit.ly/2c5GhPl also read below:

The Securities and Futures Commission (SFC) has resolved its concerns with Morgan Stanley Hong Kong Securities Limited (MSHK) over its internal control failures. Under the resolution, the SFC reprimanded and fined MSHK $18.5 million for breaches of the Code of Conduct (Notes 1 & 2).

The internal control failures of MSHK related to avoidance of conflicts of interest; comprehensive documentation of its electronic trading systems; disclosure of short selling orders; compliance with position limits and reporting of Large Open Positions; and execution of client instructions in connection with futures and stock options contract reporting obligations.

Specifically, the SFC’s investigations found that MSHK failed to:

1. adequately avoid conflicts of interest between principal and agency trading and obtain client consent for a facilitation execution in June 2013;
2. comprehensively document the design and operation of the price checks and controls applied to orders executed through its electronic trading systems after the electronic trading provisions in the Code of Conduct took effect in January 2014;
3. ensure compliance with the disclosure requirement in relation to approximately 29,000 short selling orders between January and November 2014;
4. ensure compliance with the position limits, which resulted in one stock option contract exceeding the limit by more than 300 contracts on a trading day in February 2015;
5. report the reportable Large Open Positions of two of its affiliate companies to the Exchange between December 2010 and December 2015;
6. keep positions held on a gross basis in accordance with the instructions of a client from April 2012 to December 2015; and
7. follow the instruction of an asset manager to report the Large Open Positions on a delegated basis from June 2012 to March 2016.

In reaching this resolution, the SFC took into account that:

1. MSHK co-operated with the SFC in resolving regulatory concerns;
2. MSHK agreed to engage an independent reviewer to conduct a forward-looking review of its internal controls to ensure compliance with the relevant regulatory requirements; and
3. MSHK has no disciplinary record in respect of the present failures.

End

Notes:

1. MSHK is licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 7 (providing automated trading services) regulated activities.
2. The Code of Conduct for Persons Licensed by or Registered with the SFC.

A copy of the Statement of Disciplinary Action is available on the SFC website http://bit.ly/2bC21MW