Barclays Capital, Inc. agreed to pay a fine of US $800,000 to the Commodity Futures Trading Commission to resolve charges that it failed to supervise it staff’s handling of exchange fees charged to customers from 2012 through 2014. According to the CFTC, after Barclays engaged an independent service provider to enhance its exchange fee reconciliation process in 2012, the provider, in August 2012, identified that the firm had failed in July 2012 to pass along to its customers discounts to ordinary fees from one exchange for one exchange-traded product. Apparently, afterwards, the firm accrued for overcharges to its customers “but failed to timely pay out $1.1 million in exchange fee rebates with respect to the discount program for this particular exchange-traded product.” The CFTC claimed that during the relevant time period, “Barclays failed to implement and maintain adequate systems for reconciling invoices from exchange clearinghouses with the amount of fees actually charged to its customers through its back-office accounting software.” In agreeing to Barclays’ offer of settlement, the CFTC acknowledged that, by now, the firm has provided refunds to almost all impacted customers and that its work with its independent service provider has improved the reliability of its reconciliation process. The CFTC also acknowledged that, for exchange member future commission merchants, like Barclays, the process to compute exchange fee discounts and credit them to customers “is typically complicated because of the myriad applicable rates, surcharges and fee structures.”
My View: This enforcement action is the CFTC’s second enforcement action grounded on the theory that it is allegedly a violation of an FCM’s general obligation to supervise accounts if an FCM fails to accurately reconcile exchange fees and ensure that customers are credited with overpayments on a timely basis. (Click here to access CFTC Regulation 166.3.) In 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $1.2 million to the CFTC related to the CFTC’s allegation that, from at least January 1, 2010, through April 2013, the firm failed to employ “an adequate supervisory system” related to the processing of exchange and clearinghouse fees charged to the firm’s customers. This large fine was assessed despite Merrill apparently self-detecting its own reconciliation issues, endeavoring to correct its problems through the use of two independent consulting firms, and paying out virtually all over-accrued amounts to impacted customers. It turned out that, during the relevant time period, Merrill Lynch paid more than $318 million in exchange fees, and its unexplained over-accruals of $415,318 for customers constituted less than .15 percent of its overall fees paid (Click here for details of this CFTC enforcement action in the article, “CFTC Fines Merrill Lynch $1.2 Million for Not Having an Adequate Supervisory System for Its Exchange and Clearinghouse Fees Reconciliation Process” in the September 1, 2014 edition of Bridging the Week.) Rather than bring enforcement actions against FCMs for managing the best they can with a very broken process, the CFTC should encourage exchanges to institute less complicated fee and discount structures.