SFC Fines Morgan Stanley HK Securities $18.5m for Internal Control Failures

Hong Kong’s Securities and Futures Commission (SFC) announced today that it has resolved its concerns with Morgan Stanley Hong Kong Securities (MSHK) over its internal control failures.

MSHK was reprimanded and fined $18.5 million for breaches of the Code of Conduct concerning its dealings in securities, futures contracts and provision of automated trading services.

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Internal Control Failures

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 Execution Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Execution is the process during which a client submits an order to the brokerage, which consequently executes it resulting in an open position in a given asset. The execution of the order occurs only when it is filled. There is typically a time delay between the placement of the order and the execution which is called latency.In the retail FX space, reliable brokers always strive to deliver best execution to their clients in order to maintain a solid business relationship with them. This is a co Read this Term of client instructions in connection with futures and stock options contract reporting obligations.

The SFC’s investigations found that MSHK failed to adequately avoid conflicts of interest between principal and agency trading and obtain client consent for a facilitation execution in June 2013.

In addition, MSHK failed to 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.

Furthermore, there were compliance issues regarding the disclosure requirement in relation to approximately 29,000 short selling orders between January and November 2014 and position limits, which resulted in one stock option contract exceeding the limit by more than 300 contracts on a trading day in February 2015.

Finally, MSHK failed to: report the reportable Large Open Positions of two of its affiliate companies to the Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term between December 2010 and December 2015, keep positions held on a gross basis in accordance with the instructions of a client from April 2012 to December 2015, and follow the instruction of an asset manager to report the Large Open Positions on a delegated basis from June 2012 to March 2016.

Penalties

In reaching its decision to impose an $18.5 million fine on MSHK, the SFC took into account that the firm co-operated with the Commission in resolving regulatory concerns.

The fine is the latest stiff penalty to be imposed by the SFC on financial service providers for breaches of the Code of Conduct.

In June this year, the SFC also reprimanded and fined Schroder Investment Management $1.8 million for failing to disclose all notifiable interests in Hong Kong listed shares and State Street Global Advisors Asia $4 million for failing to comply with regulations over specific funds.