HK watchdog imposes $348.25M fine on Citigroup Global Markets Asia Limited
Hong Kong’s Securities and Futures Commission (SFC) announces the imposition of a HK$348.25 million fine on Citigroup Global Markets Asia Limited (CGMAL). The penalty stems from CGMAL’s allowing various trading desks under its Cash Equities business to disseminate mislabelled Indications of Interest (IOIs) and make misrepresentations to institutional clients when executing facilitation trades from 2008 to 2018.
The SFC considers that such pervasive dishonest behaviour would not have continued but for serious lapses and deficiencies in its internal controls, compliance function and management oversight.
The SFC is also of the view that CGMAL’s failures and misconduct were attributable to the failures by certain former members of its senior management to discharge their supervisory duties. The SFC says it will commence disciplinary proceedings against these individuals in due course.
CGMAL has taken remediation steps and enhancement measures to rectify and strengthen its internal controls in respect of IOIs and client facilitation activities, including the appointment of an independent reviewer to review and validate its controls framework.
- Mislabelled IOIs
Since at least 2008, CGMAL’s Equities Sales Trading Desk had sent IOIs tagged as “Natural”, “In Touch With” and/or “P:1” to clients when there was no genuine client interest or specific client that CGMAL was in touch with.
These mislabelled IOIs, which were generated with reference to certain percentage of the average daily volumes of selected blue-chip stocks in the market, were designed to provoke client enquiries with the purported belief that traders would be able to find natural opposite flows to cross with the client order given the active trading of the stocks and the size of CGMAL’s trading platform. The Facilitation Desk of CGMAL would step in to provide liquidity when traders failed to source natural liquidity on an agency basis upon client enquiry.
CGMAL’s mislabelling of IOIs was not only contrary to the relevant industry guidelines that it claimed to have adopted but, more importantly, inconsistent with the fundamental principles of being honest with clients and treating them fairly.
- Misrepresentation and non-disclosure to conceal the principal nature of facilitation trades
The SFC reviewed 174 sample facilitation trades executed by CGMAL’s various trading desks from January 2014 to December 2018 and found that in 127 of them, the heads and traders of the desks:
- gave factually incorrect information to the client or took positive steps to conceal the principal nature of the trade;
- made misleading statements that could be interpreted by the client as indicating that the trade would be executed on an agency basis, or sometimes remained silent notwithstanding some indication of the client’s belief that the trade was an agency trade; and/or
- remained silent or were not explicit with the client about the involvement of the Facilitation Desk and failed to obtain client’s consent before routing the client’s order to the Facilitation Desk for execution.
Clients generally prefer transactions on an agency basis (ie, natural liquidity) over facilitation. By misrepresenting a facilitation trade as an agency trade or refraining from informing the client about the involvement of the Facilitation Desk, CGMAL could avoid losing a trade to a competitor.
- Internal control failures
The prevalence of the misconduct among the desks over a period of more than 10 years indicates serious and systemic lapses across CGMAL’s controls framework and its first and second lines of defence. In particular, before November 2018, CGMAL failed to:
- put in place any policies or controls to monitor the issuance of “In Touch With” and “P:1” IOIs and ensure that such IOIs were backed by specific client interest;
- have adequate internal guidelines and enforce them in relation to pre-trade disclosure of and obtaining client consent for facilitation trades. Instead, CGMAL deliberately excluded the requirement for obtaining client consent for facilitation trades when revising its compliance guidelines in 2018;
- implement effective compliance monitoring in respect of its facilitation activities to ensure that traders had made pre-trade disclosure of CGMAL’s principal capacity and obtained clients’ prior consent;
- provide training to traders on IOIs and pre-trade consent for facilitation activities;
- record and monitor communications and ensure sufficient segregation between agency and facilitation desks; and
- identify and rectify system errors that had led to the sending of erroneous post-trade messages to clients, which incorrectly indicated that CGMAL acted in an agency capacity when in fact it acted as principal.
Since at least 2014, CGMAL had multiple opportunities to identify and rectify the above failures but failed to do so until the misconduct was discovered during an SFC on-site inspection in late 2018.
In deciding the disciplinary sanctions, the SFC took into account a variety of factors, such as the remediation steps and enhancement measures implemented by CGMAL, as well as CGMAL’s cooperation with the SFC.