UBS Securities Australia pays $120,000 penalty over alleged violation of market integrity rules

UBS Securities Australia Limited has paid a $120,000 penalty over alleged violation of the ASIC Market Integrity Rules (ASX Market) 2010. The company has been given an infringement notice by the Markets Disciplinary Panel ( MDP).

The MDP found that a number of transactions in relation to six on-market buy-backs conducted by UBS on the ASX market in 2017 were not in the ordinary course of trading and were not in accordance with the clients’ instructions.

UBS purchased approximately 18 million securities over a 7-month period in relation to the buy-backs in circumstances where UBS purchased the securities other than by the matching of orders on an order book.

In particular, UBS entered into a total of 190,626 trades on the ASX Market in relation to these six buy-backs. Of those, 328 trades were entered into over a 7-month period in circumstances where UBS:

• acted on behalf of each respective buy-back client and a selling client; and
• entered into them other than by the matching of Orders on an Order Book; and
• reported the transactions to ASX as Trades with Price Improvement (NXXT).

The 328 NXXT trades resulted in purchases of more than 18 million securities by UBS on behalf of their buy-back clients. The percentage of NXXT buy-back trade volume transacted by UBS as compared to total buy-back volume transacted by UBS ranged from approximately 10%, 6% and less than 1% (in the case of three of the buy-backs) and from approximately 22%, 25% and 55% (in the case of the other three buy-backs).

The matter was brought to the attention of UBS by the Australian Securities & Investments Commission (ASIC). UBS did not self-report the matter to ASIC.

ASIC Regulatory Guide states that ‘Trades with Price Improvement’ are not in the ordinary course of trading and are not permitted for on-market buy-backs.

The MDP finds that UBS’ conduct was careless, as the DTRs did not know that NXXT trades were not in the ordinary course of trading. This indicates that UBS did not have effective internal training or communication procedures in place, despite ASIC guidance that such trades were not permitted for on-market buy-backs. Furthermore, the conduct occurred over a 7-month period for multiple buy-backs without UBS’s compliance team detecting the issue. This indicates that UBS also did not have effective internal controls in place.

Moreover, an on-market buy-back is a kind of corporate action. Participants should be aware that the trading rules in relation to corporate actions are different to the rules that would apply to trading that does not relate to corporate actions and should put in place appropriate supervisory procedures for corporate actions to ensure compliance with the rules.

Finally, in executing the trades as NXXT trades, UBS may have caused the buy-back client to contravene the Act because not all the buy-back trades were in the ordinary course of trading.

UBS has subsequently adopted remedial measures including conducting further training for the traders, updating the equities desk manual, and is implementing or developing trade monitoring enhancements.

UBS has been previously sanctioned by the MDP:

• in May 2017, the MDP issued an infringement notice (penalty $140,000) relating to the operation, use and monitoring of a crossing system known as the UBS Price Improvement Network (“UBS PIN”). A deficiency in the hard-coded logic within UBS PIN caused partially filled Orders to lose priority in certain circumstances.
• in May 2017, the MDP issued an infringement notice (penalty $140,000) relating to incorrect disclosures in crossing confirmations about execution venue and trading as principal, and the provision of incorrect regulatory data to market operators. The incorrect disclosures were caused by system errors which were not detected for 14 months (incorrect disclosure of execution venue) and 10 months (incorrect disclosure in relation to trading as Principal).
• in June and September 2013, the MDP issued two infringement notices (respective penalties $30,000 and $50,000) relating to accidental data entry errors when submitting orders.

The MDP accepts that there was no intention to contravene the market integrity rules. The conduct neither caused financial loss to UBS’ clients or to third parties nor benefitted UBS beyond the brokerage that would otherwise have been received by UBS.

The compliance with the infringement notice is not an admission of guilt or liability, and UBS is not taken to have contravened subsection 798H(1) of the Corporations Act.