Hong Kong’s securities watchdog fined Merrill Lynch Far East HK$2 million for violations by the bank of rules on position limits in its futures trading in 2013, the third time in five years Merrill has been fined by the agency for breaches of its rules.
The Securities and Futures Commission announced the fine yesterday and reprimanded Merrill for failing to have sufficient internal controls to prevent breaching the rule.
The SFC investigation found that Merrill Lynch International held 14,181 contracts in the Hang Seng China Enterprises Index on May 30, 2013, well above the limit of 12,000 contracts put in place to prevent a concentration of risk in a single holder. The HSCEI tracks the H-shares index composed of Chinese stocks listed in Hong Kong.
Merrill Lynch Far East controlled the trading for Merrill Lynch International at that time, the SFC said.
“The SFC found that Merrill Lynch Far East failed to implement adequate internal controls to monitor Merrill Lynch International’s positions in HSCEI futures and options contracts to ensure compliance with the prescribed position limit,” the SFC said in a statement. “Specifically, although Merrill Lynch Far East had a system in place to alert traders to reduce Merrill Lynch International’s position when its aggregate position reached 80 per cent of the prescribed position limit, the system failed to capture Merrill Lynch International’s expiring short positions and their potential impact on the prescribed position limit.”
The SFC said the penalty took into consideration Merrill Lynch Far East’s cooperation in the investigation and that it had since taken steps to improve its internal control on position limits.
In 2011, the SFC reprimanded Merrill Lynch (Asia Pacific) and fined it HK$3 million for inadequate systems in relation to the sale of two index-linked notes to 72 clients in 2007.
A year earlier, the SFC fined two units of Merrill Lynch HK$3.5 million after an executive’s cover-up of losses in a trading account went undetected for nearly a year. The watchdog said Merrill Lynch did not have adequate internal controls to manage its trading records, while the senior management of the two units – Merrill Lynch (Asia-Pacific) and Merrill Lynch Futures (Hong Kong) – failed to adequately manage the risks. (SCMP)