UBS fined US$2.5 million for Reg SHO failures
06 October 2022 US
Image: Azat Valeev
FINRA has fined UBS Securities LLC US$2.5 million for Regulation SHO violations and for supervisory failings extending over a nine-year period.
The US regulatory watchdog, which works under the supervision of the Securities and Exchange Commission (SEC), ruled that UBS had failed to close out at least 5300 failure-to-deliver positions between 2009 and 2018.
Over the same timeframe, UBS had also routed or executed more than 73,000 short-sale trades without first having borrowed, or arranged to borrow, the shares.
FINRA also ruled that, between 2009 and August 2022, UBS’ supervisory systems and procedures were not “reasonably designed” to meet compliance with Reg SHO Rule 204.
Specifically, UBS failed over this period to detect red flags in the firm’s books and records which indicated that its volume-weighted average price (VWAP) algorithm was routing certain buy-in orders as limit orders. Rule 204 specifies that limit orders, or other delayed orders, do not satisfy the close-out requirement.
Although UBS reviewed its Rule 204 systems annually, FINRA found that the bank had failed to recognise improper treatment of shares associated with a customer’s long sale and their availability for closing out a “failure to deliver”.
Commenting on its judgement, FINRA explained that Reg SHO Rule 204 requires that firms take affirmative action to close out “failure to deliver” positions resulting from equity short sales by borrowing or purchasing the securities before trading opens on the day after the settlement date.
When a firm does not close out a failure to deliver, Rule 204 prohibits the firm from accepting further short sale orders in this security without first borrowing, or arranging to borrow, the security. This is commonly known as the “penalty box”.
The regulator concluded that UBS had only recognised its failure to enforce Rule 204’s “penalty box” after one of its systems had malfunctioned.
FINRA’s executive vice president and head of FINRA’s Department of Enforcement says: “The short sale obligations imposed by Reg SHO afford critical protection to the markets and investors. Effective supervision focuses on every stage of a firm’s Rule 204 compliance and includes testing to confirm that systems and programming operate as intended, without unplanned consequences.”
The SEC’s Regulation SHO requires that a broker-dealer must have reasonable grounds to believe that a security can be borrowed — and delivered when due — before executing a short-selling order in an equity security. The firm must satisfy this “locate” requirement before effecting the short sale.
The US regulatory watchdog, which works under the supervision of the Securities and Exchange Commission (SEC), ruled that UBS had failed to close out at least 5300 failure-to-deliver positions between 2009 and 2018.
Over the same timeframe, UBS had also routed or executed more than 73,000 short-sale trades without first having borrowed, or arranged to borrow, the shares.
FINRA also ruled that, between 2009 and August 2022, UBS’ supervisory systems and procedures were not “reasonably designed” to meet compliance with Reg SHO Rule 204.
Specifically, UBS failed over this period to detect red flags in the firm’s books and records which indicated that its volume-weighted average price (VWAP) algorithm was routing certain buy-in orders as limit orders. Rule 204 specifies that limit orders, or other delayed orders, do not satisfy the close-out requirement.
Although UBS reviewed its Rule 204 systems annually, FINRA found that the bank had failed to recognise improper treatment of shares associated with a customer’s long sale and their availability for closing out a “failure to deliver”.
Commenting on its judgement, FINRA explained that Reg SHO Rule 204 requires that firms take affirmative action to close out “failure to deliver” positions resulting from equity short sales by borrowing or purchasing the securities before trading opens on the day after the settlement date.
When a firm does not close out a failure to deliver, Rule 204 prohibits the firm from accepting further short sale orders in this security without first borrowing, or arranging to borrow, the security. This is commonly known as the “penalty box”.
The regulator concluded that UBS had only recognised its failure to enforce Rule 204’s “penalty box” after one of its systems had malfunctioned.
FINRA’s executive vice president and head of FINRA’s Department of Enforcement says: “The short sale obligations imposed by Reg SHO afford critical protection to the markets and investors. Effective supervision focuses on every stage of a firm’s Rule 204 compliance and includes testing to confirm that systems and programming operate as intended, without unplanned consequences.”
The SEC’s Regulation SHO requires that a broker-dealer must have reasonable grounds to believe that a security can be borrowed — and delivered when due — before executing a short-selling order in an equity security. The firm must satisfy this “locate” requirement before effecting the short sale.
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