SFC Fines HSBC $2.5 Million for Internal Control Failures

Hong Kong’s Securities and Futures Commission (SFC) has reprimanded and fined Hongkong and Shanghai Banking Corporation (HSBC) $2.5 million for regulatory breaches and internal control failings related to position limit failures, according to a statement issued by the watchdog today.

Breach of Prescribed Position Limit

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

Section 4(1) of the Securities and Futures rules relating to contract limits states that no person, unless 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.

The SFC further 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.

Findings

Specifically, the SFC has highlighted the fact that HSBC failed to identify its position limit breaches promptly along with a lack of adequate knowledge within HSBC regarding its position limits and its state of compliance with the relevant regulatory requirements.

Furthermore, the SFC stated that HSBC lacked policies or procedures for position limit monitoring of HKFE’s futures and options contracts and failed to implement any position monitoring control over these contracts.

The SFC has taken into account that HSBC has since taken steps to improve its internal controls on monitoring the position limit and co-operated with the SFC in resolving its concerns, culminating in a $2.5 million fine.

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