The Hong Kong Securities and Futures Commission has resolved its concerns with two Merrill Lynch entities, but has reprimanded them and slapped them with a substantial fine.
The Securities and Futures Commission (SFC) has resolved its concerns with Merrill Lynch Far East Limited (MLFE) and Merrill Lynch (Asia Pacific) Limited (MLAP) over internal control failures.
Under the resolution, the SFC reprimanded and fined them a total of $15 million Hong Kong dollars for breaches of the Code of Conduct and the Internal Control Guidelines.
In the last quarter of 2016, the SFC, MLFE and MLAP jointly engaged an independent reviewer to review MLFE’s and MLAP’s internal controls related to its reporting of Large Open Positions (LOP), electronic trading systems, distribution of research reports involving futures contracts, and disclosure of market making activities in research reports.
Systemic Failures
The review findings revealed that MLFE failed to ensure compliance with requirements for LOP reporting under the Securities and Futures (Contracts Limits and Reportable Positions) Rules and the Rules of the Hong Kong Futures Exchange in some instances since May 2006.
In respect of the electronic trading system for trading in futures contracts, MLFE failed to put in place formal governance including key policies and procedures when the electronic trading regulations under the Code of Conduct came into effect on 1 January 2014.
MLFE also failed to effectively manage, adequately supervise and keep proper records on the design, development, deployment and operation of the electronic trading system and ensure the integrity and reliability of the electronic trading system, and that the algorithmic trading system and trading algorithms are adequately tested to ensure they operate as designed .
Code of Conduct Ignored
MLAP failed to ensure compliance with the applicable legal requirement to obtain a licence for Type 5 regulated activity before carrying on business in advising on futures contracts between May 2005 and August 2016 and MLFE failed to disclose it was a market maker in the relevant securities in research reports distributed to clients between May 2011 and November 2016.
Substantially Higher Fine Avoided
In reaching this resolution, the SFC took into account that MLFE and MLAP self-reported to the SFC the unlicensed activity and non-disclosure of market making activities in its research reports and involved their senior management in the liaison with the SFC about the regulatory concerns at an early stage.
The SFC also took into consideration that MLFE’s board of directors have undertaken that the problems unveiled in the review findings concerning the compliance with requirements for LOP reporting will be rectified within 12 months and will not reoccur after 12 months.
The SFC considers MLFE’s and MLAP’s prompt cooperation significantly expedited the disciplinary proceedings. Otherwise, similar failures would have resulted in a substantially higher level of fine.
