Hong Kong's Securities And Futures Commission Reprimands And Fines DBS Vickers (Hong Kong) Limited $2 Million For Regulatory Breaches And Internal Control Failures

The Securities and Futures Commission (SFC) has reprimanded DBS Vickers (Hong Kong) Limited (DBSVHK) and fined it $2 million for regulatory breaches and internal control failings relating to under-segregation of client money (Note 1).

The disciplinary action follows an SFC investigation into three self-reports by DBSVHK about possible non-compliance with the Securities and Futures (Client Money) Rules (Client Money Rules) (Note 2).  

During the period from June 2013 to September 2015, DBSVHK used aggregated client monies in segregated client accounts to meet settlement obligations.  In doing so, DBSVHK effectively used excess margin deposits of some clients to fulfil the margin requirement of other clients with unmet margin calls, constituting a breach of the Client Money Rules as well as the SFC’s Code of Conduct (Notes 3 & 4).    

The SFC found that DBSVHK failed to have adequate internal controls and management supervision in place to prevent under-segregation of client money and to ensure that client assets were appropriately safeguarded.  In particular, DBSVHK did not have sufficient controls governing certain processes as well as process change.

In deciding the disciplinary sanction, the SFC took into account that:

• there is no evidence that any client of DBSVHK has suffered loss as a result of the non-compliance;
• DBSVHK engaged an independent reviewer to review its client money handling process and has taken steps to remediate a number of its internal control deficiencies identified in the review;
• DBSVHK has co-operated with the SFC in resolving the disciplinary proceedings; and
• DBSVHK has an otherwise clean disciplinary record.

Notes:

1. DBSVHK is licensed under the Securities and Futures Ordinance (SFO) to carry on business in Types 1 (dealing in securities), 2 (dealing in futures contracts) and 4 (advising in securities) regulated activities.
2. Pursuant to section 5(1)(d) of the Client Money Rules, a licensed corporation that holds any amount of client money in a segregated account shall retain it there until it is required in order to meet the client’s obligations to meet settlement or margin requirements in respect of dealing in securities or futures contracts carried out by the licensed corporation on behalf of the client, being the client on whose behalf it is being held.
3. Paragraph 11.1(a) of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) provides that a licensed person should, in the handling of client transactions and client assets, act to ensure that client assets are accounted for properly and promptly.  Where the licensed person is in possession or control of client positions or assets, the licensed person should ensure that client positions or assets are adequately safeguarded.
4. Paragraph 16(a) of Schedule 4 of the Code of Conduct provides that no licensed person should apply, permit or suffer any monies, securities or any other forms of collateral standing to the credit of any client’s ledger account to be applied for the benefit of its own trading accounts, accounts of its directors or employees or for the benefit of trading accounts of any other clients.