UK regulator fines Merrill Lynch £34.5m for reporting failure

Merrill Lynch has been fined £34.5m for failing to report certain derivatives transactions over almost two years, in the first enforcement action of its kind under new European markets rules.

The Financial Conduct Authority said it had fined Merrill Lynch International, a unit of Bank of America, for failing to report 68.5m exchange traded derivative transactions between mid-February 2014 and early February 2016.

Merrill Lynch has been fined twice before by the UK’s financial services watchdog for failings in its transaction reporting.

The penalty is also the first enforcement action against a business for failing to report details of trading in exchange traded derivatives since the European Markets Infrastructure Regulation legislation was introduced after the financial crisis, the FCA said.

The Emir rules, which came into force in 2012, were, among other things, designed to increase transparency in derivatives markets by helping regulators to better spot potential exposure by banks and clearing houses to risky positions.

“It is vital that reporting firms ensure their transaction reporting systems are tested as fit for purpose, adequately resourced and perform properly,” said Mark Steward, the FCA’s executive director of enforcement and market oversight. “There needs to be a line in the sand. We will continue to take appropriate action against any firm that fails to meet requirements.”

Merrill Lynch agreed to settle at an early stage of the investigation and therefore received a 30 per cent reduction in the overall fine, the FCA said in a statement on Monday. Without the discount, the penalty would have stood at £49.3m.

Merrill Lynch had been “open and co-operative” in assisting with the investigation, the FCA said, but noted this was the third transaction reporting case involving the bank.

In 2015, the FCA fined the New York-based bank £13.3m for incorrectly reporting more than 35m transactions and failing to report others over a seven-year period up to 2014, which at the time was the largest penalty levied for that offence. That followed a £150,000 fine in 2006 for reporting inaccurate data on European equity transactions.

Transaction reports are sets of data that include information on buyers and sellers, as well as on pricing. They are submitted to the regulator the day after the financial deals have taken place and are used for market surveillance and to monitor suspicious trading activity.

The FCA is looking more closely at the timeliness and accuracy of financial transactions reporting more broadly in line with a number of new European directives.

Last week, the FCA levied its highest penalty for a listing rules breach, fining Rio Tinto, the miner, £27.4m for breaching disclosure and transparency rules over a coal deal in Mozambique.

Last month the watchdog said it had experienced a surge in reports of suspicious transactions after European rules to tackle market abuse were introduced in July 2016.

Merrill Lynch said it notified the FCA that “certain trades had not been fully reported” under Emir regulations “immediately” after the discovery.

“We are wholly committed to complying with all applicable regulatory requirements . . . We have re-evaluated and improved our related processes and can confirm that no clients were financially impacted as a result,” the bank added.

The FCA has said it expects to be able to better scrutinise the market when rules under the sprawling Mifid II directive come into force from January. These will place even greater responsibilities on banks around reporting their transactions.

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