WASHINGTON (Reuters) - The U.S. Commodity Futures Trading Commission and Justice Department on Friday ordered Merrill Lynch, Pierce, Fenner & Smith Inc to pay a total of $5 million in civil penalties for record-keeping violations and failing to supervise its traders properly in 2010.
The broker-dealer affiliate of Bank of America was found by the CFTC to have insufficient policies to ensure traders maintained accurate records for futures block trades. The Justice Department charged that traders eavesdropped on calls with counterparties to gain an unfair trading advantage.
The bank agreed to pay $2.5 million each to the CFTC and the Justice Department in related settlements.
The settlements followed probes in 2009 and 2010 by CME Group into the firm’s trading in U.S. dollar interest rate swaps and futures. As part of that investigation, CME Group staff questioned traders on Merrill Lynch’s swaps desk about whether they ever traded ahead of futures block trades from counterparties.
“We cooperated with the authorities on these matters and have implemented improvements to our monitoring process,” said a bank spokesman in a statement.
According to the CFTC, the traders “made misleading statements and failed to acknowledge that they did in fact trade ahead of futures block trades in some instances.”
And the Justice Department said the bank falsely claimed that the traders did not have advance knowledge when trading, only to revoke that claim after learning the government was investigating the matter.
The CFTC said Merrill Lynch showed “minimal oversight” over trading in that group, prompting a failure to identify improper activity. As an example, the CFTC said Merrill Lynch’s business operations team had conducted trading analysis that showed certain traders were trading ahead of block trades, but that analysis was never handed over to compliance and legal staff for corrective action.