JPMorgan Chase & Co. JPM has been levied with a $3.9-million fine (HK$30 million) by Hong Kong’s securities watchdog Securities and Futures Commission (“SFC”). The fine is led by varied control failures, including regulatory breaches, in the company’s institutional equities operations in Hong Kong, between 2010−2013.
The afore-mentioned fine specifically pertains to breaches and/or failures at J.P. Morgan Broking (Hong Kong) Limited (JPMBHK), J.P. Morgan Securities (Asia Pacific) Limited (JPMSAP) and J.P. Morgan Securities (Far East) Limited (JPMSFE). Notably, these units have been charged with fine of HK$15 million, HK$12 million and HK$3 million, respectively.
An investigation by the SFC revealed that the bank’s systems and control mechanism were inefficient to ensure regulatory compliances across various areas. According to SFC’s findings, JPMBHK and JPMSAP had erroneously aggregated inventory positions for two of its offshore affiliates to determine their net long/short positions. Notably, this led to the breach of section 8.3 of the Guidance Note on Short Selling Reporting and Stock Lending Record Keeping Requirements (published in Mar 2013), which allows for the aggregation of trading positions within the same legal entity; and does not extend to aggregation of the positions of the trading books held under separate legal entities even if they are within the same group of companies.
It was further found that the incorrect aggregation led to the creation of 41,000 uncovered short sale trade positions, an act prohibited in Hong Kong. Notably, all these trades were falsely conducted as long sale trades. The investigation also revealed that nearly 34% of short sale orders placed by JPMBHK and JPMSAP for principal trading in May 2012, lacked appropriate “documentary assurance” to verify such trades as covered.
The SFC investigation further disclosed that 7 facilitation traders and 14 principal traders had inappropriate access to client order flow information, reflecting the lack of adequate controls to prevent execution of client facilitation trade without the client’s consent.
Moreover, the SFC found that JPMorgan wrongly mixed agency orders with principal orders on JPMX, its dark pool trading platform. Apart from JPMorgan, the SFC has also penalized BNP Paribas SA BNPQY and HSBC Holdings plc HSBC for their inefficient dark pool trading practices.
A spokesperson for JPMorgan stated, "We have fully co-operated with the SFC and are pleased to have resolved these legacy issues in relation to certain aspects of our systems and controls in the institutional equities business in Hong Kong….The firm has strengthened its internal systems and controls to ensure compliance with the prevailing rules and regulations."
JPMorgan currently carries a Zacks Rank #3 (Hold). The PNC Financial Services Group, Inc. PNC is a better-ranked bank stock, holding a Zacks Rank #2 (Buy).
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