UBS has agreed to pay $12 million (£7.5 million) to US regulator the Financial Industry Regulatory Authority (FINRA), to settle serious accusations that its securities information systems were significantly flawed.
The news comes as ex-UBS trader Kweku Adoboli prepares for a plea hearing on alleged rogue trading that led to the bank losing £1.3 billion. Yesterday, UBS admitted that some key internal controls were not in place at the time.
FINRA, which regulates share trading firms, said that in incidents separate from the alleged rogue trading the Swiss bank had failed to properly conduct and supervise short selling, under a regulation known as Reg SHO.
Short selling relies on the sale of securities a company does not yet own. UBS’s apparent failures meant millions of short sale orders were mismarked or placed on the market without reasonable grounds to believe the shares could be borrowed and delivered.
Requiring firms to obtain and document this "locate" information before the short sale occurs reduces the number of potential failures to deliver a sale, FINRA said.
The regulator said UBS’s supervisory system regarding locates and the marking of sale orders was “significantly flawed”. It added that the problem “resulted in a systemic supervisory failure that contributed to serious Reg SHO failures across its equities trading business”.
UBS had placed millions of short sale orders to the market without locates, including in securities “that were known to be hard to borrow”, FINRA said.
“These locate violations extended to numerous trading systems, desks, accounts and strategies, and impacted UBS' technology, operations, and supervisory systems and procedures.”
Additionally, UBS mismarked short sales as long, and made other deficient marking decisions, FINRA said.
“Firms must ensure their trading and supervisory systems are designed to prevent the release of short sale orders without valid locates, and properly mark sale orders, in order to prevent potentially abusive naked short selling,” said Brad Bennett, FINRA executive VP. “The duration, scope and volume of UBS' locate and order-marking violations created a potential for harm to the integrity of the market."
Many of the problems were not uncovered until FINRA’s investigation led UBS to substantially review its systems and monitoring, the regulator said.
In making the settlement, UBS neither admitted nor denied the charges, but accepted the problem being recorded. It said it was “pleased to have resolved this matter”, adding that the issues have been "remediated".
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