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Screenshot of a breaking news alert e-mail from Q2 2017
Hong Kong’s Securities and Futures Commission (SFC) today announced disciplinary action against J.P. Morgan Broking (Hong Kong) Limited (JPMBHK), J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) and J.P. Morgan Securities (Far East) Limited (JPMSFE) (collectively “JP Morgan”) for various regulatory breaches and/or internal control failings.
All of the three entities were reprimanded and got fines from the regulator.
J.P. Morgan Broking (Hong Kong) Limited (JPMBHK) was fined $15 million.
J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) was fined $12 million.
J.P. Morgan Securities (Far East) Limited (JPMSFE) was fined $3 million.
The SFC has conducted an investigation that showed that JP Morgan had failed to implement adequate systems and controls in its institutional equities business in Hong Kong to provide compliance with the rules and regulations in the following areas:
- short selling activities;
- client facilitation and principal trading business; and
- operation of dark liquidity pool trading services.
Short selling activities
Between May 2010 and February 2013, JPMBHK and JPMSAP incorrectly aggregated the inventory positions controlled by a principal trading desk across two offshore affiliates in determining whether their position in a security is net long or net short. As a consequence, the two firms wrongly conducted over 41,000 uncovered short sale trades as long sale trades.
Also, contrary to the requirements under the Securities and Futures Ordinance (SFO), 34% of the short selling orders placed by JPMBHK and/or JPMSAP for their principal trading in May 2012 did not have the appropriate “documentary assurance” to confirm that the sales were covered when the short sell orders were placed.
Client facilitation and principal trading business
A review by the SFC identified that, between January 2011 and December 2012, JPMSFE and JPMSAP did not implement necessary systems and controls to prevent a client facilitation trade being executed without the client’s consent.
The SFC also found that JP Morgan gave seven facilitation traders and 14 principal traders incorrect access rights under its network shared drives and/or order management systems between January and December 2012. As a result, the facilitation and principal traders were able to view client order flow information beyond their defined access rights.
Furthermore, JP Morgan had put in place a reporting structure with potential conflicts under which the trading desks responsible for handling agency orders had a reporting line to two senior managers who were also facilitation traders prior to August 2012. JP Morgan did not establish effective systems and controls to prevent potential misuse or abuse of client agency order flow information by the facilitation traders.
Operation of dark liquidity pool trading services
In April 2011, the SFC authorized JPMBHK to carry on business in Type 7 (providing automated trading services) regulated activity. During and after the application process, JPMBHK claimed that its client-facing crossing engine JPMX was a pure agency-to-agency matching platform.
The SFC, however, found that numerous principal orders of JP Morgan were incorrectly routed into the agency pool of JPMX for matching between March and July 2012 due to human and systems errors. None of these orders were crossed in JPMX. In addition, there were instances where agency orders were incorrectly routed on two dates in August and December 2012 into a separate, non-client principal pool of JPMX.
When determining the disciplinary action, the SFC took into account that JP Morgan:
- co-operated with the SFC;
- implemented measures to rectify the concerns raised by the SFC;
- agreed to engage an independent reviewer to conduct a forward-looking review of the internal controls and systems of JP Morgan;
- has a clean disciplinary record with regards to its regulated activities.
You can view the full announcement from the Hong Kong regulator by clicking here.