September 22, 2017
CFTC Orders Merrill, Lynch, Pierce, Fenner & Smith Incorporated to Pay $2.5 Million to Settle Charges of Supervision Failures and Recordkeeping Violations
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Merrill, Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), a registered Futures Commission Merchant, for failing to supervise its employees’ and agents’ handling of the firm’s response to a CME Group Inc. (CME Group) investigation into futures block trade execution and recordkeeping practices at Bank of America, N.A. (BANA), a Merrill Lynch affiliate.
The CFTC Order 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.
The Order requires Merrill Lynch to pay a $2.5 million civil monetary penalty and 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 Order finds 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. In response, these Swaps Desk traders made misleading statements and failed to acknowledge that they did in fact trade ahead of futures block trades in some instances.
The Order finds that Merrill Lynch failed to supervise its response to CME Group’s inquiries from January 2010 through December 2010. Specifically, 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 Order 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. For example, members 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.
The Order also finds 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. In addition, the Order further finds that Merrill Lynch inconsistently implemented the procedures in place before October 2010. According to the Order, these failures resulted in records of futures block trades executed by the Swaps Desk that were either incomplete or in some cases that 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.
The CFTC thanks the U.S. Attorney for the Western District of North Carolina and the Federal Housing Finance Agency Office of Inspector General.
CFTC Division of Enforcement staff members responsible for this case are Christopher Reed, Jennifer Chapin, Stephen Turley, Jordon Grimm, Kathleen Banar, Thomas Simek, and Rick Glaser.
Last Updated: September 22, 2017