The Securities and Futures Commission (SFC) has 'settled' with Merrill Lynch Far East Limited (MLFE) and Merrill Lynch (Asia Pacific) Limited (MLAP) over their internal control failures.

In the resolution document, the SFC reprimanded and fined them a total of HK$15 million (US$1.9 million) for breaches of its Code of Conduct and Internal Control Guidelines.

In the last quarter of 2016, the SFC, MLFE and MLAP jointly employed an independent reviewer to look at MLFE’s and MLAP’s internal controls related to its reporting of Large Open Positions (LOP), electronic trading systems, distribution of research reports involving futures contracts, and disclosure of market making activities in research reports.

The review findings revealed that:

• MLFE broke LOP reporting rules in the Securities and Futures (Contracts Limits and Reportable Positions) Rules and the Rules of the Hong Kong Futures Exchange in some instances since May 2006; and
• in respect of the electronic trading system for trading in futures contracts, MLFE failed to:
(a) put in place formal governance including key policies and procedures when the electronic trading regulations (part of the Code of Conduct) came into effect on 1 January 2014;
(b) effectively manage, adequately supervise and keep proper records of the design, development, deployment and operation of the electronic trading system; and
(c) ensure the integrity and reliability of the electronic trading system, including trading algorithms.

• MLAP failed to obtain a licence for Type 5 (advising on futures contracts) regulated activity before carrying out that kind of business between May 2005 and August 2016; and
• MLFE failed to admit to being a market maker in the relevant reports to clients between May 2011 and November 2016.