A message from the SFC to licensed corporations: Mislabeling Indications of Interest may result in a substantial fine.

On 28 January 2022, the Securities and Futures Commission (“SFC”) has reprimanded and fined Citigroup Global Markets Asia Limited (“CGMAL”) HKD $348.25 million for providing mislabeled Indications of Interest (“IOIs“) to its clients and for executing IOIs without making proper prior disclosure from 2008 to 2018.

An IOI expresses a buyer’s non-binding interest in buying a security in the stock market. Broadly speaking, there are two types of IOIs. The first type of IOI is issued by a client of a licensed corporation. The execution of such IOI is known as an agency trade. A licensed corporation may only represent that an IOI is issued by its client if the IOI is backed by reasonable expectation of interest from a specific client. The second type of IOI is issued by the licensed corporation itself. The execution of such IOI is known as a facilitation trade. Conflict of interest may arise in facilitation trades, and the SFC requires licensed corporations to, amongst other things, disclose such conflict of interest to the client prior to executing the trade.

During the relevant period, CGMAL represented to its clients that the IOIs in question were backed by reasonable expectation of interest from a specific client. However, the SFC determined that CGMAL’s senior management knew or must have known that such representations were not true. When the CGMAL traders could not find clients willing to act as the buyers of the IOIs in question, the traders would execute the IOIs with CGMAL without making the required prior disclosure to the clients who are the sellers of the IOIs (“Improper Facilitated Trades”).

The SFC believes that CGMAL’s failure to correctly label the trades and failure to make proper disclosures prior to executing the Improper Facilitated Trades exposed “a culture within CGMAL which encouraged chasing revenue at the expense of basic standards of honesty and clients’ interests”. The SFC aimed to deter other licensed corporations from permitting similar failures to occur by handing CGMAL the heavy fine. The SFC has indicated that it will commence disciplinary proceedings against the senior managers responsible for permitting the failures to occur.

Licensed corporations are advised to review whether their compliance policies provide for effective monitoring in respect of its trading activities in view of the SFC disciplinary action against CGMAL.

17 February 2022
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