Hong Kong SFC Fines HSBC Securities Brokers $810k for Internal Control Failures and Breaches
4th March 2022 | Hong Kong
The Hong Kong Securities and Futures Commission (SFC) has reprimanded and fined HSBC Securities Brokers (Asia) $810,000 (HKD 6.3 million) for internal control failures and breaches of the Code of Conduct. Between 2018 to 2021, HSBC Securities Brokers (Asia), between September 2018 and September 2021, had failed to ensure compliance with the Rules of the Exchange of the Stock Exchange of Hong Kong by making multiple errors in the assignment of the Broker-to-Client Assigned Number (BCAN) to its clients who traded A-shares eligible for trading under northbound trading link of Stock Connect, also known as China Connect Securities (CCS), in the mapping of Client Identification Data (CID) to BCAN and in the tagging of BCAN to its clients’ orders. As a result, incorrect BCAN and CID information in relation to 92 clients were submitted to SEHK, involving 3,379,065 orders and 4,202,534 trades. The errors were due to deficiencies in HCCB’s client onboarding and BCAN assignment processes. The Hong Kong SFC also found that HCCB had oversold 100 CCS in nine incidents between February and June 2019, leading to settlement failures in 30 of the CCS. View full statement below:
“ Hong Kong SFC Fines HSBC Securities Brokers $810k for Internal Control Failures and Breaches “
Hong Kong SFC Official Statement:
SFC reprimands and fines HSBC Securities Brokers (Asia) Limited $6.3 million for regulatory breaches
The Securities and Futures Commission (SFC) has reprimanded and fined HSBC Securities Brokers (Asia) Limited (HCCB) $6.3 million for internal control failures and breaches of the Code of Conduct (Notes 1 & 2).
The SFC found that between September 2018 and September 2021, HCCB failed to ensure compliance with the Rules of the Exchange of the Stock Exchange of Hong Kong Limited (SEHK) (Rules of the Exchange) by making multiple errors in the assignment of the Broker-to-Client Assigned Number (BCAN) to its clients who traded A-shares eligible for trading under northbound trading link of Stock Connect, also known as China Connect Securities (CCS), in the mapping of Client Identification Data (CID) to BCAN and in the tagging of BCAN to its clients’ orders. As a result, incorrect BCAN and CID information in relation to 92 clients were submitted to SEHK, involving 3,379,065 orders and 4,202,534 trades (Notes 3 & 4).
The errors were due to deficiencies in HCCB’s client onboarding and BCAN assignment processes, including the use of multi-layered data structures that involved multiple systems in the maintenance of BCAN information, and the manual nature of the account creation procedures and the use of manual processes in updating data between the systems.
The SFC also found that HCCB had oversold 100 CCS in nine incidents between February and June 2019, leading to settlement failures in 30 of the CCS. Seven of the overselling incidents were caused by various deficiencies in HCCB’s order management and algorithmic trading systems and demonstrate that HCCB did not have adequate controls to prevent the overselling orders.
Further, the SFC found that HCCB, when carrying out its warrant market making activities, erroneously self-matched 370 warrant orders on 22 May 2020 after its market making engine (MME) restarted during the lunch trading break of SEHK. HCCB had erroneously assumed that all live orders would be automatically cancelled by a functionality offered by the SEHK and by a built in logic in the MME during the system restart. When trading resumed at 13:00, new orders placed to the market self-matched the previously un-cancelled orders.
The SFC is of the view that HCCB failed to act with due skill, care and diligence in conducting its business, and to implement adequate and effective systems and controls to ensure compliance with the Code of Conduct and the requirements of the Rules of the Exchange (Note 5).
In deciding the sanction, the SFC took into account all relevant circumstances, including:
- HCCB self-reported the regulatory breaches and failings to the SFC and took remedial actions to strengthen its internal controls and systems following the self-reports, including engaging independent reviewers to review its internal controls and processes in relation to compliance with the BCAN requirements (Note 6);
- HCCB took the initiative to bring this matter to an early conclusion and cooperated with the SFC in resolving the regulatory concerns; and
- The SEHK’s disciplinary action against HCCB over the BCAN related errors (Note 7).
The SFC has been working closely with the SEHK on this case. The SFC will continue to collaborate with the SEHK on enforcement cases involving regulated persons which are registered with the SEHK as participants.
End
Notes:
- HCCB is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities.
- Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct).
- The Mainland-Hong Kong Stock Connect (Stock Connect) is a mutual stock market access programme between Hong Kong and the Mainland which allows investors in each market to participate in the other’s markets via local intermediaries.
- The investor identification regime for northbound (NB) trading under Stock Connect was launched by the SEHK in September 2018. Under the regime, China Connect Exchange Participants (CCEP) must assign a BCAN, a unique identification code, to each NB client. Each BCAN must be mapped to the client’s CID, which includes the client’s name, identity document issuing country, identity document type and number. The client’s BCAN and CID are put in a BCAN-CID Mapping File. CCEPs must provide the BCAN-CID Mapping Files to the SEHK which will then send the information to the Shanghai and Shenzhen stock exchanges for monitoring the NB trading activities.
- Please refer to the Statement of Disciplinary Action for the relevant provisions of the Code of Conduct and the Rules of the Exchange.
- As part of its remedial measures, HCCB engaged independent reviewers in the first quarter of 2021 to conduct reviews of the processes and internal controls of HCCB in relation to compliance with the BCAN requirements under the Rules of the Exchange.
- Please see the announcement of the SEHK dated 3 March 2022.
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