Hong’s Kong’s Securities and Futures Commission (SFC) has fined Fulbright Securities HK$3.5 ($450, 000) million for short sale violations.
The SFC said in an official filing that Fulbright violated naked short selling rules between October 2015 and March 2016. Fulbright Securities Limited is alleged to have executed a minimum of 93 short sales at the time.
According to the SFC, a review revealed discrepancies in Fulbright’s internal controls and systems. As a result, the SFC said that Fulbright failed to enact proper controls to detect and stop possible illegal trades.
In addition, negligence in Fulbright’s internal controls led to the firm submitting inaccurate information to the SFC. The firm therefore failed to report the discrepancies immediately to the SFC after discovering their existence.
In short selling, investors make gains by borrowing a stock, selling it, and then agreeing to buy it back. They buy the stock at a lower price to return it back to the lender. At all times, short sellers bet that a stock will drop in price. Normally, investors pick a stock they believe will appreciate in value in the future and sell it for a profit.
Hong Kong’s SFC Has Strict Guidelines for Short Selling
The short selling concept plays a critical role in developed capital markets like Hong Kong. It makes the price discovery process more efficient and smoothens volatility in the markets. Short selling also provides investors with a variety of options for risk-managing their portfolios.
In Hong Kong, the SFC employs a set of regulations to ensure markets are not unfairly manipulated through short selling. First, SFC requires securities brokers to deliver the shares upon completion of the short sale transaction. Firms can either choose to report on the settlement date or show initiative by closing out the failure to deliver shares. They can do this by either buying or borrowing the securities.
A broker is also required to limit ongoing naked short positions, by rejecting additional sale orders. This becomes necessary if the securities were not closed out or delivered within legally stipulated time frames.
Fulbright Is Otherwise Fully Compliant
Despite the hefty fine, the SFC noted that Fulbright is a compliant broker with no previous history of disciplinary action. The Hong Kong securities regulator said that the firm has been fully cooperative during the investigation. The SFC also did not find any evidence to indicate that the broker made the errors deliberately.
In similar SFC news about Fulbright, the broker was among three others that SFC stopped from processing orders last year. The orders were listed on derivative warrants issued against client accounts linked illegal trading activity.
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