HK SFC Fines UBS Securities Hong Kong $1.6 Million for Regulatory Breaches
The disciplinary action follows an SFC investigation into the holding of UBS on behalf of its client, UBS AG London, of 175,697 contracts in China Construction Bank stock options in breach of the prescribed position limit of 150,000 contracts on 18 October 2011 (Notes 2, 3, 4 & 5).
The SFC also found that UBS failed to implement adequate internal controls to ensure that all opened positions in stock options contracts it held or controlled were in compliance with the prescribed position limits (Notes 6 & 7).
In particular, the SFC found that UBS:
• only implemented a real time monitoring system for one trading desk, the Equities Volatility Trading Desk, and failed to extend the monitoring system to other trading desks, even though it knew these trading desks were actively trading single stock options listed on the Stock Exchange of Hong Kong Limited (SEHK) since December 2010; and
• in the absence of a real time monitoring system, failed to implement adequate procedures to guide trading staff of its other trading desks on how and who to approach for monitoring and checking position limits.
In deciding the penalty, the SFC has taken into account UBS’s co-operation and that it has since strengthened its internal controls on the monitoring of position limits.
1. UBS is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 6 (advising on corporate finance) and Type 7 (providing Automated Trading Services) regulated activities.
2. Rule 4(1) of the Securities and Futures (Contracts Limits and Reportable Positions) Rules (Rules) provides that no person, except persons authorized by the SFC or the Hong Kong Exchanges and Clearing Limited, may hold or control futures contracts or stock options in excess of the prescribed limit.
3. Section 5(b) of the Rules provides that the limit on the number of contracts that may be held or controlled, in the case of stock options contracts, is specified in Schedule 2 of the Rules.
4. Schedule 2 of the Rules provides that the prescribed limit for stock options contracts on shares listed on the SEHK is 50,000 open contracts per option class in any one market direction for all expiry months combined.
5. In 11 June 2011, the SEHK granted UBS’s application to increase the prescribed position limit for China Construction Bank stock options to 150,000 open contracts in any one direction for all expiry months combined until 31 December 2011.
6. General Principle 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct) requires a licensed person to comply with all regulatory requirements applicable to the conduct of its business activities.
7. Paragraph 12.1 of the Code of Conduct requires a licensed person to comply with and maintain appropriate measures to ensure compliance with all applicable regulatory law, rules, regulations and codes administered or issued by the SFC, exchanges, clearing houses and other regulatory authorities which apply to the licensed person.
8. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC’s website.