LONDON, Dec 28 (Reuters) - A U.S. brokerage regulator slapped a $1.75 million fine on Credit Suisse for failing to meet local rules governing the supervision of short sales of securities, in a crackdown that has also hit Swiss rival UBS.
In short sales, investors sell securities they do not own, hoping that their price will fall before buying them back and returning them, pocketing the difference.
Credit Suisse violated a U.S. regulation known as SHO, which requires a broker or dealer to have reasonable grounds to believe that a security can be borrowed and is available for delivery before accepting a short sale order, the Financial Industry Regulatory Authority (FINRA) said.
The regulator said Credit Suisse’s supervisory and compliance monitoring system was “seriously flawed”, over a period spanning June 2006 through to December 2010.
It added that the bank released millions of short sale orders to the market without documenting whether it would be able to locate and deliver the securities, a requirement under regulation SHO.
The bank also mismarked tens of thousands of sale orders in its trading systems, identifying them as “long” when they were in fact short sales, FINRA said.
“We are pleased that we have reached closure and this matter is now behind us,” Credit Suisse said.
FINRA handed out a much bigger penalty of $12 million to Switzerland’s UBS in October, for very similar violations from 2005 to 2010.
FINRA’s chief of enforcement told Reuters then that the regulator had not identified any specific delivery failures, but UBS was also fined for the inadequacy of its systems.
Regulation SHO was imposed in 2005 by the U.S. Securities and Exchange Commission (SEC) to clamp down on abusive “naked” short selling -- when investors sell short without first borrowing the underlying shares or making sure they can be borrowed.
The rules are meant to ensure that brokerages can deliver shares on short-sale transactions they process.
UBS was also charged by the SEC in November for faulty record-keeping related to short sale orders, and settled by agreeing to pay an $8 million fine.