Hong Kong's capital market regulator, SFC, has fined two units of Bank of America-Merrill Lynch around 450,000 dollars after it emerged that an executive of the firm concealed losses in a trading account.
The Securities and Futures Commission has fined Merrill Lynch (Asia Pacific) Limited and Merrill Lynch Futures (Hong Kong) Ltd $450,000 for systems and controls failings associated with the mis-marking activities in a trading book, a statement issued by the market regulator said.
The SFC's investigation found that in the period between December 2007, to October 2008, a managing director of Merrill Lynch had mis-marked a trading book by manipulating volatility marks in the valuation model and accessed the computer system without authority to alter pricing parameters on various occasions.
The mis-marking activities, which did not apply to any other books, resulted in the value of the book being inflated by approximately $25 million and caused the actual loss in the book to be wrongly reported internally, it said.
"Licensed corporations must have effective procedures in place to manage risks of trading books. For books that deal in illiquid assets which have low price transparency, more robust measures must be in place. The proper implementation of an effective risk management framework could have enabled Merrill Lynch to detect the mis-marking earlier," SFC executive director of enforcement Mark Steward said.
Merrill Lynch, which is now a part of Bank of America, has accepted that its systems and controls fell short of those expected in respect of the book, the statement added.
The SFC also agreed that misconduct was not intentional and Merrill Lynch has taken remedial steps to address the compliance weaknesses. In deciding on the sanctions, the SFC took into account Merrill Lynch's cooperation in resolving the case, it noted.
