Hong Kong's Securities and Futures Commission has punished Morgan Stanley Hong Kong Securities Ltd for failures in its internal controls with a hefty fine.

The internal control failures at Morgan Stanley related to the avoidance of conflicts of interest; comprehensive documents about its electronic trading systems; the disclosure of short-selling orders; compliance with position limits and reporting of large open positions; and the execution of clients' instructions in connection with futures and stock options contract reporting obligations.

The regulator says that MSHK failed to:

• do enough to avoid conflicts of interest between principal and agency trading;
• obtain the consent of clients for a 'facilitation execution' in June 2013;
• write comprehensively notes about the design and operation of the price checks and controls applied to orders executed through its electronic trading systems after the electronic trading provisions in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission took effect in January 2014;
• obey the 'disclosure requirement,' whatever that may be, in relation to approximately 29,000 short selling orders between January and November 2014;
• observe position limits (its failure to do this resulted in one stock option contract exceeding the limit by more than 300 contracts on a trading day in February 2015);
• report the reportable large open positions of two of its affiliate companies to the stock exchange between December 2010 and December 2015;
• keep positions held on a gross basis in accordance with the instructions of a client between April 2012 and December 2015; and
• follow the instruction of an asset manager to report the large open positions on a delegated basis from June 2012 to March 2016.

Morgan Stanley Hong Kong is licensed under the Securities and Futures Ordinance to do business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 7 (providing automated trading services) regulated activities.