BNP Paribas Securities Corporation was recently fined for failing to create or maintain a risk management system of controls or procedures to handle the financial risks of its market access business activity. Specifically, FINRA found that the firm made multiple supervisory failures, provided market access through its Global Execution Services (GES) Desk, and maintained unreasonable credit and erroneous order controls.
For members of an exchange or alternative trading system, market access refers to the available access to trading in securities on the trading system.
In October 2013, the Firm was aware internally of potential gaps in its controls for financial risk management designed for the GES Desk.
Despite this awareness, over 165,000 GES Desk customer equities orders were routed to exchanges and/or ATSs by BNP Paribas, which represented about 7% of the GES Desk’s total customer equities order flow (2,276,885 orders) from January 1, 2015 to September 18, 2019.
Generally, BNP Paribas set the single-order quantity limit and single-order notional value limit for each customer at unreasonably high levels at which the controls could not prevent erroneous orders by themselves. BNP Paribas also did not have any control for market access customer orders. Consequently, a multitude of orders were created from malfunctioning algorithms, software programs and trading systems.
The FINRA findings stated that:
- BNP Paribas did not provide appropriate written procedures to guide supervisors to properly recommend credit thresholds for customers and failed to establish aggregate credit thresholds for direct market access customers.
- BNP Paribas’ financial risk management controls and supervisory procedures for its direct market access business were not reasonably designed to prevent the entry of erroneous orders or orders exceeding “pre-set credit thresholds in the aggregate for each customer.”
- Because of the unreasonable controls and supervisory system, BNP Paribas failed to prevent the transmission of erroneous orders to the markets on at least two trade dates.
- BNP Paribas never established or maintained a supervisory system, including WSPs, that could reasonably address these issues.
BNP Paribas violated FINRA Rules 3110 and 2010, NASD Rule 3010, Section 15(c)(3)e of the Securities and Exchange Act of 1934, and SEC Rule 15c3-5(b), (c)(1)(i), (c)(1)(ii), and (e). As a result, the firm was censured, fined $650,000, ($260,000 of this is payable to FINRA,) and must certify that the financial risk management controls and procedures have been reviewed and are now reasonably in compliance with SEC Rule 15c3-5(c)(1) (i) and (ii).