Administrative Action on Citigroup Global Markets Japan
1. The Securities and Exchange Surveillance Commission (SESC) conducted an inspection on Citigroup Global Markets Japan Inc (hereinafter referred to as the ”Company”), and found the following violation of the Financial Instruments and Exchange Act (hereinafter referred to as the ”FIEA”). On December 9, 2011, the SESC recommended to take administrative action against the Company.
(1) Inadequate response to the administrative order
In response to the order by the FSA pursuant to Article 56-2, paragraph 1 of the FIEA, the Company submitted a report regarding the involvement of directors/employees in Euroyen TIBOR (hereinafter referred to as “TIBOR”) and Yen LIBOR.
The SESC, through its inspection, verified the accuracy and sufficiency of the content of the report, and revealed that the report lacked a description of important matters regarding inappropriate approaches against submitting rates and contained an untruthful description, that the conclusion of the report was derived from this untruthful description, and that, therefore, the contents of the report were inappropriate.
The lack of important matters and the untruthful description in the report are acknowledged to violate the administrative order by the FSA Commissioner based on Article 56-2 of the FIEA, and the Company’s actions related to the report are acknowledged to fall under Article 52, paragraph 1 (vi) of the FIEA, which stipulates “violation of the disposition given by government agencies under laws and regulations pertaining to Financial Instruments Business.”
(2) Inappropriate actions related to TIBOR
The Head of the G10 Rates in the Company (at that time; hereinafter referred to as “Director A”) had continuously conducted such approaches as requesting a person in charge of submitting the TIBOR rates of Citibank Japan Ltd. (hereinafter referred to as “Submitting Personnel”) to change its rates since around April 2010 at the latest, and a JPY Rates trader at the G10 Rates (hereinafter referred to as “Trader B”) had continuously conducted such approaches as requesting persons in charge of submitting the TIBOR rates of other banks (or securities firms belonging to their financial conglomerates, hereinafter, including Submitting Personnel, referred to as “Submitting Personnel, etc.”), since Trader B joined the Company in December 2009, to fluctuate TIBOR so as to give advantages to the Derivatives Transactions related to yen rates which Director A and Trader B were conducting.
The actions conducted by Director A and Trader B are acknowledged to be seriously unjust and malicious, and could undermine the fairness of the markets, considering that three-month TIBOR is the underlying asset of Three-month Euroyen Futures listed on Tokyo Financial Exchange Inc., Director A and Trader B conducted transactions of Three-month Euroyen Futures on Tokyo Financial Exchange Inc., and TIBOR is a significantly important financial index as a basic interest rate when banks raise or lend money. Therefore, the aforementioned actions by Director A and Trader B are acknowledged to have a serious problem from the viewpoints of the public interest and protection of investors.
Furthermore, Trader B had also continuously conducted inappropriate approaches, such as requesting to change the Yen-LIBOR rates that Citibank group submitted, since December 2009.
In spite of recognizing these actions, the President and CEO (hereinafter referred to simply as the “CEO”), who was also responsible for the G10 Rates, overlooked these actions and the Company did not take appropriate measures, therefore, the Company’s internal control system is acknowledged to have a serious problem.
As mentioned above, i) Director A and Trader B are acknowledged to have conducted approaches against Submitting Personnel, etc. for Market Transactions of Derivatives that they were conducting under the Company’s proprietary trading legally defined as Financial Instruments Business, ii) the actions are acknowledged to be unjust and malicious, from the viewpoints of the public interest and protection of investors, and could undermine the fairness of the markets, iii) Trader B conducted approaches regarding not only TIBOR but also Yen-LIBOR, and iv) the Company’s internal control system is acknowledged to have a serious problem. Therefore, the Company’s actions are acknowledged to fall under Article 52, paragraph 1 (ix) of the FIEA, which stipulates “when a wrongful act or extremely unjust act has been conducted with regard to Financial Instruments Business, and when the circumstances are especially serious.”
(3) Sales activity without necessary registration of a Sales Representative by a senior executive
Director A had conducted Market Transactions of Derivatives since November 12, 2009.
However, the Company had not registered Director A as a Class-1 Sales Representative with Japan Securities Dealers Association, which is necessary to conduct Market Transactions of Derivatives, until June 16, 2010.
The CEO has not taken appropriate measures, such as directing related sections, including the Compliance Division, to address this issue, even after the CEO recognized that Director A conducted sales activities without necessary registration. Therefore, the Company’s internal control system is acknowledged to have a serious problem.
The Company had the employee conduct duties of Sales Representatives without necessary registration; such action of the Company is acknowledged to constitute a breach of Article 64, paragraph 2 of the FIEA.
2. Administrative Action against the Company
On the basis of the violation above, the FSA today issued the following administrative action against the Company based on Article 51 and Article 52 (1) of the FIEA.
(1) Business Suspension Order
Suspend the Company’s derivative transactions related to TIBOR and LIBOR from January 10 to January 23, 2012 (excluding transactions necessary for the termination of existing contracts, etc)
(2) Business Improvement Order
(a) Clarify the responsibility of the top management regarding the violation.
(b) Secure strict compliance by all the management and staff members.
(c) Take preventive measures against recurrence of the above- mentioned violations, including radical measures to improve the control environment for governance and business operation.
(d) Submit a written report to the FSA on the implementation of (i) the above measures ((a) – (c)) by January 16, 2012, and (ii) (b) and (c) by March 30, 2012, every three months thereafter, and at any time as needed in consideration of the implementation status.