The Securities and Futures Commission (SFC) has reprimanded and fined Citigroup Global Markets Asia Limited (CGMAL) $4 million over CGMAL’s regulatory breaches in relation to the operations of its alternative liquidity pool (ALP) (Notes 1 & 2).
The disciplinary action followed an SFC investigation on CGMAL, which found that the operations of Citi Match, the ALP of CGMAL, failed to comply with the relevant requirements from December 2015 to August 2016 as set out in the Code of Conduct (Note 3).
CGMAL was expected to operate Citi Match with due skill, care and diligence, and required to:
- Provide the ALP Guidelines to users to ensure that they are fully informed on how the ALP operates; and
- Ensure that only qualified investors are permitted to be users of the ALP (Notes 4, 5 & 6).
However, due to an incorrect system setting of client profiles, over 130 clients had accessed Citi Match without being assessed whether they were qualified investors. CGMAL also failed to provide the clients with the ALP Guidelines prior to routing their first orders to Citi Match.
In reaching the resolution, the SFC took into account all relevant circumstances, including that CGMAL:
- Took remedial actions to rectify the situation shortly after identifying the incorrect system setting and subsequently implemented enhanced measures to ensure compliance; and
- Took the initiative to bring this matter to a conclusion by cooperating with the SFC to resolve the regulatory concerns.
- CGMAL is licensed under the SFO to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), Type 5 (advising on futures contracts), Type 6 (advising on corporate finance) and Type 7 (providing automated trading services) regulated activities.
- Code of Conduct for Persons Licensed by or Registered with the SFC.
- Paragraph 19 of and Schedule 8 to the Code of Conduct, which came into effect on 1 December 2015, set out the requirements for ALP operations.
- General Principle 2 of the Code of Conduct provides that in conducting its business activities, a licensed corporation should exercise due skill, care and diligence, in the best interests of its clients and the integrity of the market.
- Paragraph 19.7 of the Code of Conduct provides that a licensed corporation operating an ALP should, by means of ALP Guidelines (as defined in paragraph 19.2(a)), provide sufficiently comprehensive information to the users (as defined in paragraph 19.2(g)) of the ALP to ensure that they are fully informed as to the manner in which the ALP operates, and prior to routing any order to an ALP on behalf of a client for the first time, a licensed corporation should ensure that the ALP Guidelines have been brought to the attention of the person placing or originating the order.
- Paragraph 19.4(a) and paragraphs 7 and 8 of Schedule 8 to the Code of Conduct provide that a licensed corporation should establish and implement measures to ensure, and all reasonable steps have to be taken to ascertain, that only qualified investors (as defined in paragraph 19.2(f)) are permitted to be users of ALP. Paragraph 19.4(b) provides that a licensed corporation should only route orders to an ALP on behalf of clients where such orders are placed or originated by a person who is a qualified investor.