Japan’s FSA takes administrative action against Citigroup Global Markets Japan Inc
The action is taken in response to failures in Citi’s trade surveillance system.
Japanese authorities have taken action against Citigroup Global Markets Japan Inc over failures in its trade surveillance system.
The Securities and Exchange Surveillance Commission (SESC) conducted an inspection of the company, and has determined that the company violated a set of laws and ordinances. On April 19, 2019, the SESC recommended that the Financial Services Agency (FSA) takes administrative action against the company. Considering this recommendation, the FSA today (June 7, 2019) issues an administrative action against Citigroup Global Markets Japan based on Article 51 of the Financial Instruments and Exchange Act (FIEA’).
The company operates trade surveillance leveraging market derivatives trading control system that was jointly developed by the U.S. headquarters of Citigroup Inc. and external vendors. Due to failures in this system, some transaction data necessary for trade surveillance (such as the data manually operated in pull order cancel, and the data leveraged split execution order strategy in the form of algorithmic trading) were not delivered to trade surveillance system. That is why the regulator concluded that the company failed to cover these transaction in its trade surveillance.
Further, the company has been found to have inappropriately narrowed down the coverage of trade surveillance. In terms of setting threshold for extracting spoofing transactions, the company inappropriately shortened the time-period between the order and the cancellation, without conducting any internal verification of the rationality of the setting threshold embedding a lot of factors including the size of market derivative transactions.
In addition, due to a failure in setting of trade surveillance system, the company’s trade surveillance failed to cover market derivative transactions executed in the evening trading markets.
Also, despite the fact that the company recognized a lot of alerts for suspicious market frauds intensified towards a single trader, it failed to take any thorough actions, such as close investigation into the intention of transactions, and scrutinizing the data of transaction. Under this trade surveillance framework, the company overlooked and executed orders of the spoofing transactions in JGB futures market committed by Citigroup Global Markets Limited.
The FSA today issues a business improvement order against Citigroup Global Markets Japan. Under the order, the company will have to enhance and strengthen its business management/internal control framework (including necessary cooperation with global and other foreign branches/subsidiaries to comply with laws and regulations in Japan). The company is also expected to rebuild firm-wide compliance and sound business culture.
Further, the company will have to set up/fully implement an improvement plan and preventive measures in line with it.
The company will have to submit the first written report about the situation and results of the review to the FSA as of July 5, 2019.
The action by the Japanese regulator is announced just a day after Citi was fined CHF 28.5 million by Switzerland’s Competition Commission (COMCO) over anti-competitive practices in the Forex market. Traders of several internationally active banks – Barclays, Citigroup, JPMorgan, MUFG Bank, Royal Bank of Scotland (RBS), and UBS, have partially coordinated their conduct in two separate cartels in foreign exchange spot markets regarding certain G10-currencies (USD, EUR, GBP, JPY, AUD, NZD, CAD, CHF, NOK, SEK), the Swiss regulator has found.
