Merrill Lynch Fined $2.5 Million Over Supervision Violations

BANA didn’t have policies in place to supervise a support group that was tasked with gathering information on futures trades.

Merrill Lynch, Pierce, Fenner & Smith Inc. today settled charges brought by the Commodity Futures Trading Commission (CFTC) related to the firm’s handling of the CME Group’s investigation into futures block trade execution and recordkeeping practices.

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The US regulator said on Friday that it has ordered the broker-dealer affiliate of Bank of America to pay a $2.5 million civil penalty to settle allegations that it failed to properly supervise its employees, which potentially allowed them to trade ahead of futures trades after receiving a block trade inquiry from certain traders.

According to the CFTC, for several months between 2009 and 2010, Merrill Lynch failed to ensure that certain responses to CME Group’s inquiries were adequate to help the exchange detect disorderly trading and manipulative behaviour.

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Specifically, BANA didn’t have policies in place to supervise a support group that was tasked with gathering information on Merrill Lynch’s business operations.  The 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 agency said.

In response to CME’s follow-up inquiries, Merrill Lynch only provided trading analysis on the activities of its swaps desk. However, it revealed that this group failed to pass on that additional information to the firm’s compliance and legal staff until CME Group commenced its investigation.

“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,” said the CFTC.

The CFTC said that in settling the action, Merrill Lynch has promised changes in light of the commission’s findings, including enacting enhancements to its US futures-related controls and supervision to ensure that “it prepares and maintains accurate and complete records of futures block trades executed by its affiliates.”

In a related move, the CFTC brought and settled allegations against Merrill Lynch, alleging that the company had inadequate procedures for preparing and maintaining records of futures block trades in accordance with agency’s regulations.

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