HONG KONG: The Securities and Futures Commission has fined two units of US investment bank Merrill Lynch HK$3.5 million (RM1.47 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.
The SFC and Merrill Lynch on Monday, May 31 refused to comment on whether the managing director, who was not identified, received any penalty.
An SFC probe found that from December 2007 to October 2008, the managing director had mismarked a trading book in exotics options by manipulating valuation input. The managing director also accessed the computer system without authority to alter pricing on various occasions.
These activities inflated the value of the option trading by US$25 million, which resulted in the actual trading loss not being reported internally. The firm's other trading books did not have a problem, it said.
"Licensed corporations must have effective procedures in place to manage risks of trading books," said Mark Steward, the SFC's executive director of enforcement. "For books that deal in illiquid assets which have low price transparency, more robust measures must be in place. The proper implementation of an effective risk management framework could have enabled Merrill Lynch to detect the mismarking earlier."
In the SFC statement, Merrill Lynch accepted that its systems and controls fell short of expectations and said it had taken remedial steps to address the compliance weaknesses.
The SFC accepted that Merrill Lynch's misconduct was not intentional and the firm co-operated. A number of brokerage firms have been fined. In March, Tsun Chi Yuen Securities was fined HK$2 million for breaching the commission's code of conduct. A month earlier, it fined Fukoku Investment (Asia) HK$2 million for failing to detect and stop an unlicensed firm from carrying out an alleged "boiler room" scam.
The biggest SFC fine was HK$38 million in June 2008 imposed on ICEA Securities and ICEA Capital for internal controls and compliance systems problems. In 2005, ICEA had paid HK$30 million to the SFC as settlement in exchange for not admitting wrongdoing over its sponsorship of Euro-Asia Agricultural (Holdings) in 2001. ' South China Morning Post
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.
The SFC and Merrill Lynch on Monday, May 31 refused to comment on whether the managing director, who was not identified, received any penalty.
An SFC probe found that from December 2007 to October 2008, the managing director had mismarked a trading book in exotics options by manipulating valuation input. The managing director also accessed the computer system without authority to alter pricing on various occasions.
These activities inflated the value of the option trading by US$25 million, which resulted in the actual trading loss not being reported internally. The firm's other trading books did not have a problem, it said.
"Licensed corporations must have effective procedures in place to manage risks of trading books," said Mark Steward, the SFC's executive director of enforcement. "For books that deal in illiquid assets which have low price transparency, more robust measures must be in place. The proper implementation of an effective risk management framework could have enabled Merrill Lynch to detect the mismarking earlier."
In the SFC statement, Merrill Lynch accepted that its systems and controls fell short of expectations and said it had taken remedial steps to address the compliance weaknesses.
The SFC accepted that Merrill Lynch's misconduct was not intentional and the firm co-operated. A number of brokerage firms have been fined. In March, Tsun Chi Yuen Securities was fined HK$2 million for breaching the commission's code of conduct. A month earlier, it fined Fukoku Investment (Asia) HK$2 million for failing to detect and stop an unlicensed firm from carrying out an alleged "boiler room" scam.
The biggest SFC fine was HK$38 million in June 2008 imposed on ICEA Securities and ICEA Capital for internal controls and compliance systems problems. In 2005, ICEA had paid HK$30 million to the SFC as settlement in exchange for not admitting wrongdoing over its sponsorship of Euro-Asia Agricultural (Holdings) in 2001. ' South China Morning Post
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