The CFTC charged the firm with failing to supervise its Bank of America affiliate’s response to a CME Group investigation of the block trade execution of futures instruments and related recordkeeping.
The CFTC has required Merrill, Lynch, Pierce, Fenner & Smith Inc. to pay a $2.5 million civil monetary penalty for “failing to supervise its employees’ and agents’ handling of the firm’s response to a CME Group investigation into futures block trade execution and recordkeeping practices at Bank of America.”
Bank of America, N.A., or BANA, is a Merrill Lynch affiliate. And Merrill Lynch is a registered futures commission merchant. (“Registered futures commission merchants” were created by the same congressional legislation that established the CFTC.)
The CFTC also finds that “Merrill Lynch did not have adequate procedures to ensure that its employees and agents prepared and maintained accurate records of futures block trades executed by BANA and that Merrill Lynch failed to maintain records of certain futures block trades executed by BANA as required by Commission Regulations.”
In addition to the $2.5 million civil monetary penalty, the CFTC also requires Merrill Lynch to “comply with undertakings to improve its procedures and controls to ensure that it prepares and maintains accurate and complete records of futures block trades executed by its affiliates.”
Specifically, the CFTC charges that “in 2009 and 2010 CME Group inquired into the futures block trade execution and recordkeeping practices of the U.S. Dollar interest rate swaps and block futures trading desk at BANA (the ‘Swaps Desk’). As part of these inquiries, CME Group Market Regulation staff interviewed certain traders on the Swaps Desk and asked whether traders on the Swaps Desk ever traded ahead of futures block trades by electronically trading futures contracts after receiving a block trade inquiry from a counterparty but before executing that block trade.”
Those swaps desk traders, the CFTC says, “made misleading statements and failed to acknowledge that they did in fact trade ahead of futures block trades in some instances. The [CFTC] Order finds that Merrill Lynch failed to supervise its response to CME Group’s inquiries from January 2010 through December 2010.”
Specifically, the CFTC says, Merrill Lynch “relied on the business operations support group at BANA to gather information for Merrill Lynch’s response to the CME Group’s inquiries. However, Merrill Lynch exercised minimal oversight over the work of this group and failed to stay adequately informed regarding the group’s findings.”
The CFTC “finds that Merrill Lynch’s lack of diligence in supervising the work of this group contributed to its failure to detect trading ahead by certain traders on the Swaps Desk before these traders misled CME Market Regulation staff during their interviews.”
The CFTC cites the following example: “[M]embers of the business operations support group prepared a trading analysis that showed certain members of the Swaps Desk trading substantial volumes of futures contracts electronically in the five minutes before the Swaps Desk executed a block trade in that futures contract, but did not share this trading analysis with Merrill Lynch compliance and legal staff. As a result, Merrill Lynch compliance and legal staff never saw this internal evidence of trading ahead before responding to CME Group’s inquires and before the interviews of the Swaps Desk traders.”
Furthermore, the CFTC concludes that “between January 2010 through October 2010, Merrill Lynch had inadequate procedures for preparing and maintaining records of futures block trades in accordance with CFTC Regulations 1.31 and 1.35,” and that Merrill Lynch “inconsistently implemented the procedures in place before October 2010.”
The results of “these failures,” the CFTC concludes, is that “records of futures block trades executed by the Swaps Desk … were either incomplete or in some cases … had incorrect or missing execution times. The Order further finds that from at least January 2010 until June 2012, Merrill Lynch violated CFTC Regulations 1.31 and 1.35 by failing to prepare and/or maintain records of futures block trades executed by the Swaps Desk.”
FTF News contacted a BofA media representative for comment, and particularly for some sense of the specific “undertakings to improve its procedures and controls” that the CFTC says Merrill is putting into place. This was the reply:
“We cooperated with the authorities on these matters and have implemented improvements to our monitoring process.”
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