The amount pales in comparison to the $2.3 billion loss Zurich investment giant UBS took in its third quarter for an “unauthorized trading incident” that it says it detected but failed to act on.

But now UBS is taking a $12 million hit for failing to “properly supervise short sales of securities” as well.

The Financial Industry Regulatory Authority said it fined UBS Securities that amount for the supervisory failure and for violating Regulation SHO, which governs short-selling practices.

FINRA said millions of short sale orders were mismarked or placed by UBS in the market “without reasonable grounds to believe that the securities could be borrowed and delivered.”

In short sales, the seller sells a security it does not own. Reg SHO establishes rules by which the short seller must “locate” the amount of the security it must purchase or borrow in order to complete the sale. The seller must document it has located the security before the sale is conducted.

In addition, Reg SHO requires a broker-dealer to mark sales of equity securities as long or short.

FINRA found that “UBS' Reg SHO supervisory system regarding locates and the marking of sale orders was significantly flawed and resulted in a systemic supervisory failure’’ in stock trading.

The independent regulator of brokers found that UBS placed millions of short sale orders to the market without “locates” and in some cases included securities “that were known to be hard to borrow”

UBS also mismarked millions of sale orders in its trading systems, often saying the transactions were “long” sales, when they were not, the regulator said.

FINRA also found that UBS had significant deficiencies related to its aggregation units that may have contributed to additional significant order-marking and locate violations.

“The duration, scope and volume of UBS' locate and order-marking violations created a potential for harm to the integrity of the market," Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said.

Many of UBS' violations were not detected or corrected until after FINRA's investigation caused UBS to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance. FINRA found that UBS' supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations until at least 2009.

In concluding this settlement, UBS neither admitted nor denied the charges, but consented to the entry of FINRA's findings. 

-- This article first appeared on Securities Technology Monitor.


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