How Long Does It Take for FINRA To Act?

Is FINRA Effective? Do investors need the fiduciary standard -- or is suitability enough?

How Long Does It Take for FINRA To Act?

Postby GeorgiaGulf » Tue Oct 25, 2011 12:42 pm

This article from the Dealbreaker site gives you a clue.


Um, This Isn’t So Good
By Matt Levine



Poor Sergio Ermotti was having a pretty good day today, with UBS’s stock up and clients more or less happy with the new business plan of “make 180% of your income on DVA and spend 140% of it on comp.” And then this went and happened:

UBS agreed to pay $12 million on Tuesday to settle accusations that it failed to oversee millions of short-sale trades over the last five years.
The Financial Industry Regulatory Authority, or Finra, accused the embattled Swiss bank of a “systemic supervisory failure.” The fine is among the stiffer penalties recently paid to Finra, Wall Street’s self regulator.
“The fine reflected broad gaps in their compliance system,” J. Bradley Bennett, Finra’s enforcement chief, said in an interview. “I think it’s very significant.”

Ordinarily it would be hard to get all that worked up about violations of Regulation SHO, the U.S.’s semi-prohibition on naked short selling. And that’s all this is, Reg SHO violations: UBS basically did a lot of shorting without properly locating borrowable stock, leaving them with naked shorts and settlement fails. Not great, but relatively benign for this week (or last week!).

Except, this (from the FINRA press release) sounds somehow familiar:

First, FINRA found that UBS placed millions of short sale orders to the market without locates, including in securities that were known to be hard to borrow. These locate violations extended to numerous trading systems, desks, accounts and strategies, and impacted UBS’ technology, operations, and supervisory systems and procedures. Second, FINRA found that UBS mismarked millions of sale orders in its trading systems. Many of these mismarked orders were short sales that were mismarked as “long,” resulting in additional significant violations of Reg SHO’s locate requirement. Third, FINRA found that UBS had significant deficiencies related to its aggregation units that may have contributed to additional significant order-marking and locate violations.


Wait – UBS traders put in millions of orders without going through proper procedures, supervisors didn’t catch them, they marked orders on one side of the market as being on the other side of the market, and they couldn’t figure out how to net trades against each other internally? Do you think Kweku knew about this? Wasn’t UBS going to sit everyone down and remind them not to, um, do exactly those things what with the whole losing $2 billion thing?

Actually, if there’s any relief for Ermotti it’s that the state of affairs that FINRA is fining them for apparently ended sometime in “late 2010,” about a year after FINRA started asking questions. Penetrating questions like “why do you mark your short sales as longs?” So clients and investors shouldn’t be at all worried, everything’s fine now.

Still. FINRA noticed that UBS was marking its trades incorrectly, not supervising them properly, and mucking up internal aggregation. So they told UBS about it. In 2009. Two years later Kweku Adoboli marked his trades incorrectly, wasn’t caught by supervisors, and may or may not have been able to cover up his positions with fake internal netting. And lost $2 billion or so. The extensive advance notice seems to put a bit more of the blame for Kweku’s katastrophe on UBS – and, for that matter, FINRA – than we thought.

GeorgiaGulf
 
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