JP Morgan Securities settled an enforcement action brought by the Commodity Futures Trading Commission, claiming that the firm failed to “diligently” supervise its staff when the firm did not remit exchange fee rebates totaling US $7.8 million to relevant customers from 2010 to 2014. The CFTC claimed this was because the firm did not have, during the relevant time, automated systems to reconcile its exchange and clearing fees and utilized solely one employee to perform its fee reconciliation process. Moreover, said the CFTC, JPMS did not have adequate written policies and procedures regarding its reconciliation process. The CFTC acknowledged that, in July 2015, JPMS retained a consultant to advise it on its fee procedures, and in January 2016 implemented a new fee and commission calculation system and reconciliation tool. In addition, JPMS is currently “migrating clients to new pricing arrangements in which exchange and clearing fees are incorporated into an agreed rate, which does not change unless clients are notified of a change.” JPMS has now mostly paid out all exchange rebates it previously did not pay to its clients, acknowledged the CFTC. To resolve this matter, JPMS agreed to pay a fine of US $900,000.
My View: Last summer, Barclays Capital, Inc. agreed to pay a fine of US $800,000 to the CFTC 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 this breakdown occurred because, during the relevant time, the firm failed to implement and maintain adequate systems for reconciling invoices from exchange clearinghouses with the amount of fees actually charged to its customers. In 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated also 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. Although the CFTC acknowledged in both its Barclays and JPMS settlement orders that the process related to the assessment of exchange and clearing fees is “typically complicated because of the myriad applicable rates, surcharges and fee structures,” it sanctioned both firms because of their failure to catch their mistakes through a reconciliation process. 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 and implement tools to help firms conduct reconciliations more easily and reliably. (Click here for background on the CFTC’s enforcement actions against Barclays and Merrill Lynch in the article “FCM Agrees to Pay US $800,000 Fine to CFTC Because of US $1.1 Million in Erroneous Customer Exchange Fees Charges” in the August 7, 2016 edition of Bridging the Week.)