October 23, 2009
Financial Services Agency
Administrative Action on BNP Paribas Securities (Japan) Limited
1. The Securities and Exchange Surveillance Commission (SESC) conducted an inspection on BNP Paribas Tokyo Branch (hereinafter referred to as the ''Branch''), and found the following violation of the Financial Instruments and Exchange Act (hereinafter referred to as the ''FIEA''). On October 16, 2009, the SESC recommended to take administrative action on the Branch.
Ο Inadequate response to the administrative orders
The Branch became subject to the administrative action (hereinafter referred to as “the Administrative Action”) on November 28, 2008, by the FSA, because the problematic practices at the Branch were acknowledged to fall under “the case that both the Branch's business management control system and internal control system had serious defects, which includes cases of overlooking inappropriate business operations.” The Administrative Action refers to the Branch's transactions whereby it sold stocks issued by a client with the statements, “the Branch sold the client's stocks mechanically as part of the implementation of the swap transaction contract with the headquarters of BNP Paribas in France,” and the transactions were acknowledged to fall under Article 38 (vi) of the FIEA and Article 117, paragraph 1 (xvi) of the Cabinet Office Ordinances Concerning Financial Instruments Business, etc., which prohibits “trade based upon undisclosed corporate information.”
Preceding the Administrative Action, the Branch submitted reports (hereinafter referred to as “the Reports”) in response to the administrative orders by the FSA Commissioner issued based on Article 56-2 of the FIEA. The contents of the Reports formed the critical basis for the Administrative Action.
However, SESC, through its inspection, revealed the followings:
(1) The Reports were incomplete in terms of content and contained untruthful descriptions;
(2) The Branch produced the Reports without sufficient research and verification;
(3) A part of the transactions recognized by the Administrative Action, as “trade based upon undisclosed corporate information” could not be qualified as the transaction referred to with the statement, “the Branch sold the client's stocks mechanically as part of the implementation of the swap transaction contract with the headquarters of BNP Paribas in France.”
The Branch's actions listed above are acknowledged to violate administrative orders by the FSA Commissioner based on Article 56-2 of the FIEA and to fall under Article 52, paragraph 1 (vi) of the FIEA, which stipulates “violation of the disposition given by government agencies under laws and regulations pertaining to Financial Instruments Business.”
Ο Purchase of Securities for the purpose of fixing prices of the specific Listed Financial Instruments
A trader, who was in the equity and option department of the Branch, as part of the business, at the closing auction in the afternoon session, on November 5, 2008, sent a massive purchase order for a specific listed stock, by way of placing “limited orders” just before the closing of the market with a price 1 yen below and with a price at the daily maximum price limits, for the purpose of fixing the stock prices in the daily maximum price limits bidding quotation. Due to these orders, the stock price was fixed in special bid quotes at the daily maximum price limits.
The aforementioned action by the Branch and the trader is acknowledged to fall under Article 38 (vi) of the FIEA and Article 117, paragraph 1 (xix) of the Cabinet Office Ordinances Concerning Financial Instruments Business, etc. which prohibits “purchases or sales of, trading the derivatives of, or making offering or entrustment of these transactions etc. of Listed Financial Instruments, etc. in a Financial Instruments Exchange Market or Over-the-Counter Traded Securities in an Over-the-Counter Securities Market, for the purpose of fluctuating, pegging, fixing or stabilizing prices or figures calculated based on a price or a transaction volume of Listed Financial Instruments, etc. or the Over-the-Counter Traded Securities, or for the purpose of increasing the transaction volume of those Listed Financial Instruments etc. or Over-the-Counter Traded Securities.”
Inadequate response to administrative orders is a serious problem which hinders appropriate financial administration by the FSA, and purchasing of securities for the purpose of fixing prices of specific listed financial instruments is an aggravated behavior which reduces the fairness and transparency of the securities markets.
Especially, as for the Equities & Commodity Derivatives Division of the Branch:
A trader belonging to the Division executed a transaction which was acknowledged by the Administrative Action to fall under Article 38 (vi) of the FIEA and Article 117, paragraph 1 (xvi) of the Cabinet Office Ordinances Concerning Financial Instruments Business, etc., which prohibits “trade based upon undisclosed corporate information.” Furthermore, the same trader is implicated in the inadequate response to the administrative orders.
A trader belonging to the Equity and Option Department, which is a part of the Division, purchased securities for the purpose of fixing prices of the specific Listed Financial Instruments.
Therefore, all the management and staff of the Equities & Commodity Derivatives Division must enhance compliance in order to ensure appropriate business operation. Furthermore, it is recognized that the branch must fundamentally enhance its governance and internal control, considering that the executives and the internal control department overlooked the above-mentioned problems.
2. Administrative Action on the Branch
On the basis of the violation above, the FSA today issued the following administrative action to the Branch based on the Article 51 and the Article 52 (1) vi of the FIEA.
(1) Business Suspension Order
Suspend all business of the Equities & Commodity Derivatives Division of the Branch from November 2 to November 16 (excluding businesses necessary for performance, or the termination of existing contracts, and other businesses specifically approved by the FSA)
(2) Business Improvement Order
1) Clarify the responsibility of the management and staff regarding the violation.
2) Enhance compliance by all the management and staff through training, etc. In particular, keep all management and staff of the Equities & Commodity Derivatives Division informed of the activities relating to securities transactions that are prohibited under the FIEA, etc.
3) Execute necessary measures, such as construction of procedure and enhancement of structure, in order to ensure appropriate and effective internal audit and inspection.
4) Conduct a fundamental review of the Branch's trade approval system.
5) Review and execute appropriately the business improvement plan that was made in response to the Business Improvement Order issued on November 28, 2008, in order to fundamentally enhance the governance and internal control system.
6) Submit reports to the FSA on the implementation of the above-mentioned measures by November 24, 2009, (in addition, by January 29, 2010, and every three months thereafter about the implementation status) and at any time as needed.
Financial Services Agency, Government of Japan
Tel +81-(0)3-3506-6000 (main)
Securities Business Division, Supervisory Bureau (ext. 3370, 3356)
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