SFC reprimands and fines Merrill Lynch Far East Limited $2 million for regulatory breaches

1 Apr 2015



The Securities and Futures Commission (SFC) has reprimanded and fined Merrill Lynch Far East Limited (Merrill Lynch Far East) $2 million for regulatory breaches and internal control failings relating to position limit failures (Note 1).

The decision follows an SFC investigation into the holding of Merrill Lynch International (MLI) in 14,181 contracts in Hang Seng China Enterprises Index (HSCEI) on 30 May 2013 in breach of the prescribed position limit of 12,000 contracts. Merrill Lynch Far East controlled the trading or part of the trading for MLI and had discretion to make trading decisions for MLI for hedging at the material time (Note 2).

The SFC found that Merrill Lynch Far East failed to implement adequate internal controls to monitor MLI’s positions in HSCEI futures and options contracts to ensure compliance with the prescribed position limit (Note 3).

Specifically, although Merrill Lynch Far East had a system in place to alert traders to reduce MLI’s position when its aggregate position reached 80% of the prescribed position limit, the system failed to capture MLI’s expiring short positions and their potential impact on the prescribed position limit. This resulted in Merrill Lynch Far East’s failure to detect the expiry of a large short position in HSCEI futures contracts on 30 May 2013 and the corresponding increase in MLI’s long position which contributed directly to the position limit breach.

In determining the penalty, the SFC has taken into account Merrill Lynch Far East’s co-operation and that it has taken steps to strengthen its internal controls on monitoring position limits.

End

Notes:

  1. Merrill Lynch Far East is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on 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 contracts in excess of the prescribed limit.

    Section 5(a) of the Rules provides that the limit on the number of contracts that may be held or controlled, in the case of futures contracts, is specified in Schedule 1 of the Rules.

    Schedule 1 of the Rules provides that the prescribed limit for Hang Seng China Enterprises Index contracts is 12,000 long or short position delta for all contract months combined.
  3. General Principle 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) requires a licensed person to comply with all regulatory requirements applicable to the conduct of its business activities.

    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.

A copy of the Statement of Disciplinary Action is available on the SFC’s website



Page last updated : 1 Apr 2015