June 7, 2019
Financial Services Agency
Administrative Actions against Citigroup Global Markets Japan Inc.
The Securities and Exchange Surveillance Commission (SESC) conducted an inspection on Citigroup Global Markets Japan Inc. (hereinafter referred to as the ''Company”), and found the following violation of laws and ordinances. On April 19, 2019, the SESC recommended Financial Services Agency (FSA) to take administrative action against the Company.
Considering the above recommendation, FSA today (June 7, 2019) issued an administrative action against the Company based on Article 51 of the Financial Instruments and Exchange Act (hereinafter referred to as the ''FIEA'').
I. Factual Information
- Deficiency in trade surveillance related to market transactions of derivatives
- Failures in market derivatives trading control system
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, therefore the Company inadequately failed to cover these transaction in their trade surveillance.
- Failures in trade surveillance system
The Company 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.
- Deficiency in trade surveillance framework
Despite the fact that the Company recognized a lot of alerts for suspicious market frauds intensified towards a single trader, the Company failed to take any thorough actions, such as close investigation into the intention of transactions, and scrutinizing the data of transaction.
Under the above trade surveillance framework, the Company inadequately overlooked and executed orders of the spoofing transactions in JGB futures market committed by Citigroup Global Markets Limited., consequently SESC recommended FSA to issue administrative monetary penalty payment order issued on March 26, 2019.
The above situation of the Company falls under Article 123(1)(XII) of Cabinet Office Order on Financial Instruments and Exchange, etc. based on Article 40(2) FIEA.
II．Content of Administrative Action
- Business improvement order
- In relation to the above issue, enhance and strengthen the Company’s business management/internal control framework (including necessary cooperation with global and other foreign branches/subsidiaries to comply with laws and regulations in Japan). For example, the Company is expected to have a clear business attitude to achieve compliance and appropriate business operation. The Company is also expected to rebuild firm-wide compliance and sound business culture.
- Taking into account the assessment of factual information and causes of occurrence/root causes, set up/fully implement an improvement plan and preventive measures in line with it.
- Review the effectiveness of the preventive measures mentioned in above 2, and implement additional measures necessary.
- Regarding above 1~3, submit the first written report about the situation and results of the review to the FSA as of July 5, 2019. After the first report, the due date will be every three months thereafter, in a written format as necessary.
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Office for Foreign Financial Institutions, Supervisory Bureau (ext. 2278, 2885)
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