SFC reprimands and fines Merrill Lynch Far East Limited $2 million for regulatory breaches 

The Securities and Futures Commission (SFC) has reprimanded and fined Merrill Lynch Far East Limited (Merrill Lynch Far East) $2 million for regulatory breaches and internal control failings relating to position limit failures (Note 1).

The decision follows an SFC investigation into the holding of Merrill Lynch International (MLI) in 14,181 contracts in Hang Seng China Enterprises Index (HSCEI) on 30 May 2013 in breach of the prescribed position limit of 12,000 contracts. Merrill Lynch Far East controlled the trading or part of the trading for MLI and had discretion to make trading decisions for MLI for hedging at the material time (Note 2).

The SFC found that Merrill Lynch Far East failed to implement adequate internal controls to monitor MLI’s positions in HSCEI futures and options contracts to ensure compliance with the prescribed position limit (Note 3).

Specifically, although Merrill Lynch Far East had a system in place to alert traders to reduce MLI’s position when its aggregate position reached 80% of the prescribed position limit, the system failed to capture MLI’s expiring short positions and their potential impact on the prescribed position limit. This resulted in Merrill Lynch Far East’s failure to detect the expiry of a large short position in HSCEI futures contracts on 30 May 2013 and the corresponding increase in MLI’s long position which contributed directly to the position limit breach.

In determining the penalty, the SFC has taken into account Merrill Lynch Far East’s co-operation a

Source: SFC – SFC reprimands and fines Merrill Lynch Far East Limited $2 million for regulatory breaches

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