Citigroup Global Markets Asia Limited (CGMAL) has been fined and reprimanded by the Hong Kong Securities and Futures Commission (SFC) over failures by the company to comply with the regulatory requirements in relation to the operations of its alternative liquidity pool (ALP).
In its Statement of Disciplinary Action, the SFC explains that the $4 million fine is imposed pursuant to section 194 of the Securities and Futures Ordinance (SFO). Following a thematic review of ALPs conducted between 2016 and 2017, the SFC became concerned about CGMAL’s alternative liquidity pool, Citi Match. That is why the regulator investigated the operations of Citi Match.
Prior to December 1, 2015, CGMAL had prepared for compliance with the ALP requirements including reviewing the qualified investor status of some clients and providing them with the ALP Guidelines. However, it overlooked that its system had defaulted certain clients as allowed to match trades in Citi Match, when their orders should not have been enabled access to ALP.
The incorrect default setting was not detected until the SFC’s thematic review in 2016. As at August 1, 2016, the default setting of over 470 clients was incorrect and the orders of over 130 clients were routed to Citi Match for execution without the company having assessed the clients as qualified investors and without providing them with the ALP Guidelines.
According to the regulator, although the affected clients appear to be qualified investors, CGMAL was still responsible for them being fully informed as to how Citi Match operates by bringing the ALP Guidelines to their attention. The Consultation Conclusions Concerning the Regulation of ALPs have made it clear that “no matter how sophisticated a qualified investor is, it would still be crucial for the investor to be provided with comprehensive and accurate ALP Guidelines for the assessment of the risks and features of an ALP.”
In reaching the decision on the penalty, the SFC took into account a number of factors, including that CGMAL:
- (a) took remedial actions to rectify the situation in August 2016 after the incorrect default setting issue was discovered in late July 2016. Subsequently, it also implemented enhanced measures to ensure compliance. The evidence suggests all users who were onboarded after August 2016 were qualified investors and were provided with the ALP Guidelines before their first access to Citi Match; and
- (b) took the initiative to bring this matter to a conclusion by cooperating with the SFC to resolve the regulatory concerns.