Hong Kong regulator fines Citigroup US$509,660 for dark pool compliance failure
The SFC said it considered disciplinary action against Citigroup necessary following its failure to comply with code of conduct requirements related to its alternative liquidity pool
The Securities and Futures Commission has reprimanded and fined Citigroup Global Markets Asia HK$4 million (US$509,660) for misconduct within its dark pool operation, the regulator said in a statement on Tuesday.
The SFC found the problem during a thematic review of Citigroup’s alternative liquidity pool, which is commonly known as a dark pool, and found the firm has failed to comply with certain code of conduct requirements from December 2015 to August 2016.
Dark pools are off-exchange electronic trading systems that match buy and sell orders without disclosing the identity of the parties, prices or volumes.
The SFC tightened regulations for dark pool operators by banning retail investors under rules that took effect in December 2015. Only sophisticated professional investors, insurers, fund managers and pension fund managers were allowed to trade on the platforms under the new rules.
The SFC found that Citigroup had made some preparations for its dark pool platform Citi Match before December 2015 to prepare for compliance with the new regulation, including a review of investors trading on the platform.
“However, it [Citigroup] 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 alternative liquidity pool,” the SFC said. “The incorrect default setting was not discovered 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 having assessed the clients as qualified investors and without providing them with the alternative liquidity pool guidelines.”
The SFC said although the affected clients appear to be qualified investors, Citigroup had an obligation to explain the changes in regulation.
“No matter how sophisticated a qualified investor is, it would still be crucial for the investor to be provided with comprehensive and accurate alternative liquidity pool guidelines for the assessment of the risks and features of an alternative liquidity pool,” the SFC said.
In reaching the resolution, the SFC took into account that Citigroup has taken remedial action to rectify the situation.
“Citi cooperated fully with the SFC and has agreed to resolve this legacy issue relating to alternative liquidity pools in Hong Kong,” a Citigroup spokeswoman said.
“The resolution announced by the SFC today noted Citi has already taken actions to rectify the situation. Citi also noted there was no actual impact on clients, which were all qualified investors, and no client opted out of Citi Match after being provided with the alternative liquidity pool guidelines which already existed on the bank’s website.”