FINRA imposes $3.75M fine on UBS for inaccurate reporting of options positions
UBS Securities LLC has agreed to pay a $3,750,000 fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From January 2010 through September 2021, UBS failed to report and inaccurately reported OTC options positions to the Large Options Positions Reporting system (LOPR) in at least 7.1 million instances.
Let’s note that FINRA requires member firms to report large options positions to the LOPR. FINRA uses LOPR information to surveil for potentially manipulative behavior, including attempts to corner the market in the underlying equity, leverage an option position to affect the price, or move the underlying equity to change the value of a large option position.
From January 2010 through September 2021, UBS failed to report OTC options positions to the LOPR in approximately 436,000 instances and inaccurately reported certain required information for OTC options positions to the LOPR in more than 6.6 million instances. These violations were caused by three technology issues, each of which persisted for at least six years.
First, from January 2010 through June 2018, UBS failed to report to the LOPR positions in OTC options overlying foreign securities where it acted as an intermediary between U.S.-based customers and its foreign affiliates. These intermediated positions were booked to its foreign affiliates’ systems and therefore were not fed into UBS’s LOPR reporting system.
As a result, UBS failed to report OTC options positions to the LOPR in approximately 436,000 instances.
Second, from January 2010 through September 2020, UBS reported inaccurate short- covered quantities to the LOPR in millions of instances. During this time, UBS could not systematically determine the short-covered quantity of OTC options positions and instead chose to program its systems to report a default quantity to the LOPR. As a result, from January 2010 through June 2019, UBS reported a default covered quantity equal to the short quantity, misreporting most short positions as fully covered.
In July 2019, UBS changed the default to report a covered quantity of zero for new positions. UBS’s reporting remained inaccurate because (1) some short positions had a covered quantity greater than zero and (2) pre-existing positions continued to be misreported as fully covered.
This issue impacted the majority of UBS’s LOPR reports for short positions in OTC options. For example, from July 2014 through May 2020, UBS reported inaccurate short-covered quantities to the LOPR in approximately 6.6 million instances.
Third, from August 2015 through September 2021, a technology coding issue impacted UBS’s LOPR reporting for certain high-net-worth clients. As a result, UBS reported inaccurate account names and account addresses to the LOPR in 24,446 instances.
Therefore, UBS violated FINRA Rules 2360(b)(5) and 2010.
Also, from January 2010 through June 2018, UBS booked positions in OTC options overlying foreign securities where it acted as an intermediary between U.S.-based customers and its foreign affiliates to its foreign affiliates’ systems that did not feed into its position limit monitoring systems. As a result, UBS established certain OTC options positions that exceeded the applicable position limits.
For example, between May 2017 and June 2018, UBS established at least seven positions, six on behalf of customers and one on behalf of a firm account, in four OTC options that exceeded the applicable position limit of 25,000 contracts. These positions were over the limit for periods ranging from two days to 208 days.
Therefore, UBS violated FINRA Rules 2360(b)(3) and 2010.
Moreover, UBS failed to reasonably investigate and act upon red flags of LOPR reporting deficiencies. UBS identified the three reporting issues described above but unreasonably failed to correct them for several years. First, UBS identified the intermediated positions issue in November 2013 and self-reported the issue to FINRA in November 2017, but did not correct the issue until June 2018.
Also, UBS identified the short-covered quantity issue in mid-2015 and hired a consultant to review the issue, as well as its compliance with LOPR reporting rules, in October 2018, but did not take any corrective action until mid-2019 and did not fully remediate the issue until September 2020.
UBS identified the account name and address issue in mid-2018 but only after FINRA identified the issue and raised it with UBS in January 2021 did UBS determine the root cause and then implement a systematic fix in September 2021.
In addition, from January 2016 through November 2022, UBS failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with FINRA Rule 2360(b)(5). During this period, UBS’s supervisory system and written procedures for LOPR reporting failed to provide for any supervisory review to determine whether the short-covered quantity information reported to the LOPR was accurate.
Therefore, UBS violated NASD Rule 3010 and FINRA Rules 3110 and 2010.
On top of the fine, the firm has consented to a censure.