Morgan Stanley’s Hong Kong securities business has been reprimanded and fined HK$18.5 million ($2.4 million) for a series of internal control failures, as banks face a growing list of regulations.
The internal control failures 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.
The Securities and Futures Commission (SFC) sanctions reflect the fact that the rollout of various new rules in Hong Kong is raising compliance complexity, particularly for large, diversified financial services firms, said Josephine Chung, director of Hong Kong-based consulting firm CompliancePlus.
She cited several examples of recently imposed and upcoming requirements: the professional investors regime that took effect from March 23, 2016; the incoming obligations around central clearing of over-the-counter derivatives; and the upcoming SFC licensing regime for expanded type 9, type 11, and type 12 licensed entities relating to OTC derivatives.
Chung suggested that the bigger firms should consider implementing automated compliance systems or ‘robot lawyers’ to help ensure they keep on top of the regulations.
Internal control failures
In the latest case, the SFC found that Morgan Stanley Hong Kong Securities (MSHK) had failed to:
- avoid conflicts of interest between principal and agency trading and obtain client consent for a facilitation execution in June 2013;
- comprehensively document the design and operation of the price checks and controls applied to orders executed through its electronic trading systems;
- ensure compliance with the disclosure requirement in relation to about 29,000 short-selling orders between January and November 2014;
- ensure compliance with position limits, which resulted in one stock option contract exceeding the limit by more than 300 contracts on a trading day in February 2015;
- report large open positions of two of its affiliate companies to the exchange 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.
The SFC took into account that:
- MSHK co-operated with the SFC in resolving regulatory concerns;
- the firm agreed to engage an independent reviewer to conduct a forward-looking review of its internal controls to ensure compliance; and
- MSHK has no disciplinary record in respect of the present failures.
MSHK is licensed 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.