Hong Kong's Securities And Futures Commission Reprimands And Fines HSBC $2.5 Million For Regulatory Breaches

The Securities and Futures Commission (SFC) has reprimanded and fined The Hongkong and Shanghai Banking Corporation Limited (HSBC) $2.5 million for regulatory breaches and internal control failings related to position limit failures (Note 1).

The disciplinary action follows an SFC investigation into the holding by HSBC of open positions in Hang Seng China Enterprises Index futures and options contracts in breach of the prescribed limit on 18 occasions from 26 May to 1 August 2014 (Note 2).

The SFC also found HSBC in breach of the SFC’s Code of Conduct for failing to implement adequate internal controls to monitor its positions in Hong Kong Futures Exchange’s (HKFE) futures and options contracts to ensure compliance with the prescribed position limit (Note 3).

Specifically, the SFC found that:

• HSBC failed to identify its position limit breaches promptly;
• there was a lack of adequate knowledge within HSBC regarding HSBC’s position limits and its state of compliance with the relevant regulatory requirements; and
• HSBC lacked policies or procedures in place for position limit monitoring of HKFE’s futures and options contracts and failed to implement any position monitoring control over these contracts.

In deciding the penalty, the SFC has taken into account that HSBC has since taken steps to improve its internal controls on monitoring of position limit and co-operated with the SFC in resolving the SFC’s concerns.

Notes:

1. HSBC is a registered institution 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 5 (advising on futures contract), Type 6 (advising on corporate finance) and Type 9 (asset management) regulated activities.
2. Section 4(1) of the Securities and Futures (Contracts Limits and Reportable Positions) 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. The prescribed limit for Hang Seng China Enterprises Index futures contracts and options contracts is 12,000 long or short position delta for all contract months combined.
3. Under General Principles 3 and 7 of the Code of Conduct for Persons Licensed by and Registered with the SFC (Code of Conduct), a registered institution is required to have and employ effectively the resources and procedures which are needed for the proper performance of its business activities and to comply with all regulatory requirements applicable to the conduct of its business activities respectively. Under Paragraph 12.1 of the Code of Conduct, a registered institution is required 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 registered institution.