The Securities and Futures Commission (SFC) has issued a reprimand to Delta Asia Securities Limited (Delta Asia) and fined it $4 million for failing to reasonably ensure that client securities were properly safeguarded (Note 1).
The SFC found that during the period from January 2010 to February 2013, Delta Asia used shares belonging to clients and held in segregated client accounts at the Central Clearing and Settlement System (CCASS) to settle transactions for its other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. This occurred without the consent or authorization of the clients whose shares were used for settlement in contravention of the Securities and Futures (Client Securities) Rules on 36 occasions during the period (Notes 2 & 3).
The SFC also found that Delta Asia failed to implement proper controls to safeguard client securities and to supervise its staff in discharging its settlement function, thus allowing the unauthorized transfers of client securities from the CCASS segregated client accounts to its CCASS clearing account to have gone unchecked for more than three years.
Safe custody of client assets is a fundamental obligation of licensed corporations. Any transgression of this obligation, even if the relevant clients are made whole again, cannot be tolerated. In the present case, Delta Asia had clearly breached this fundamental obligation and prejudiced the interests of its clients.
In deciding the sanctions, the SFC took into account that Delta Asia has co-operated with the SFC in resolving these disciplinary proceedings.
Notes:
- Delta Asia is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 3 (leveraged foreign exchange trading) and Type 4 (advising on securities) regulated activities.
- Sections 6 and 10 of the Securities and Futures (Client Securities) Rules respectively specifies the circumstances in which intermediaries may withdraw or otherwise deal with client securities received or held on behalf of clients and requires intermediaries to take reasonable steps to ensure that client securities are not deposited, transferred, etc, except in the manner specified in the rules.
- In addition, the SFC found that on two occasions during the period, Delta Asia had transferred shares belonging to clients and held in the CCASS segregated client accounts to its CCASS clearing account, with a view to settling the transactions for Delta Asia’s other clients who did not have sufficient shares in their accounts to discharge their respective settlement obligations on the settlement date. However, the transferred shares were eventually not sent to the Hong Kong Securities Clearing Company Limited for settlement purpose as a result of the netting of Delta Asia’s positions in the same security on the same day. This occurred without the consent or authorization of the clients whose shares were transferred and were in breach of the Securities and Futures (Client Securities) Rules notwithstanding that the transferred shares were eventually not used for settlement purpose.
- A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.