UK-based Merrill Lynch International consented to the imposition of a fine of £34.5 million (the equivalent of over US $45 million) by the UK Financial Conduct Authority for not making certain reports of exchange-traded derivatives (“ETD”) transactions to trade repositories as required under the European Market Infrastructure Regulation. Specifically, FCA alleged that, from February 2014 through February 2016, MLI—an indirect subsidiary of Bank of America—failed to make 68.5 million required reports of the market-side leg of certain ETD transactions involving non-European Union third-party brokers.
According to FCA, under relevant EMIR rules, when MLI acted as an intermediary for a customer in connection with each exchange transaction, the firm was required to report to a trade repository both its transaction with its client, as well as its transaction with the exchange.
FCA said that the firm’s failure was attributed to a static data table within MLI’s reporting system that did not properly flag some non‑EU third-party brokers as necessitating the generation of a synthetic market side for reporting. FCA alleged that the firm’s errors were not detected earlier because its reporting function was inadequately staffed, it failed to undertake any “appropriate testing” of its reporting between February 2014 and October 2015, and the firm conducted only an inadequate manual test in October 2015.
FCA accorded MLI a 30 percent discount for settling this matter at an early stage. FCA noted that MLI self-reported its breaches and fully cooperated with the regulator’s investigation.
This was the first enforcement action brought by FCA alleging a trade-reporting breakdown in connection with ETD transactions under EMIR. MLI is authorized by FCA to provide regulated products and services.
Compliance Weeds: Under applicable Commodity Futures Trading Commission rules, all swap dealers are obligated to publicly report all reportable swap transactions to a swap data repository as soon as practicable after a transaction is executed. Publicly reportable swap transactions include “[a]ny termination, assignment, novation, exchange, transfer, amendment, conveyance, or extinguishing of rights or obligations of a swap that changes the pricing of a swap.” Extinguishing events include cancellations, claimed the CFTC. In addition, reporting parties are obligated to correct any mistakes in their swap reporting as soon as technologically possible after discovery. (Click here to access CFTC Rules Part 43; see §§ 43.2 and 43.3, and here to access CFTC Rules Part 45; see §§ 45.3, 45.4 and 45.14.)
The CFTC has filed and resolved multiple enforcement actions against swap dealers for non-compliance with these requirements. (Click here for background in the article “International Swap Dealer Settles With CFTC for Alleged Failure to Timely Report Certain OTC Swaps” in the December 11, 2016 edition of Bridging the Week.)
In December 2015, staff of the Commission’s Division of Swap Dealer and Intermediary Oversight published a Staff Advisory reminding swap dealers and major swap participants of their obligations to report certain swap data timely and accurately (click here to access). Staff noted “diverse reporting issues and failure” (with certain types of errors occurring “with some frequency”), readily apparent errors, incomplete reporting, duplicative swap reporting, calculation errors and reporting delays. Staff recommended utilizing certain measures or processes to enhance reporting quality, data gatekeepers, automated review of reported data, erroneous record checks and improved changed management practices to help mitigate potential issues.