The Financial Conduct Authority has fined Merrill Lynch International over £34.5m for failing to report details of 68.5 million derivatives transactions in breach of EMIR and Principle 3 of the FCA's Principles for Businesses. This is the second largest FCA fine levied so far in 2017. This is the first ever enforcement action for failure to report details of derivatives transactions as required by EMIR. Under EMIR, since February 12, 2014, counterparties to derivatives contracts have been required to submit reports detailing those transactions to trade repositories. These reporting obligations seek to improve transparency in the derivatives markets.
Principle 3 of the FCA's Principles for Businesses requires firms to take reasonable care to organize and control their affairs responsibly and effectively, with adequate risk management systems. MLI breached this Principle because it failed to allocate sufficient personnel resources with the right level of EMIR reporting expertise to the reporting requirements, failed to conduct appropriate testing in relation to the reporting requirements, and had an oversight system which did not review compliance with the reporting requirements in sufficient detail. As a result of these failures, an error with a static data table within MLI's reporting system which was causing the transactions to be unreported was not identified and corrected until February 2016.
In 2014, MLI had twice opened internal self-identified audit issues, identifying that it did not have governance and oversight in place to assess regulatory reports, and highlighting the Article 9 EMIR reporting requirement as a particularly high risk area to be subject to review. No substantive steps were taken to address the risk until May 2015, when a pilot manual test was conducted. It was after manual testing was rolled out that the FCA raised questions with MLI over the detail of reports, resulting in MLI undertaking targeted testing through which it identified the error in the static data table.
As aggravating factors, the FCA took into account MLI's 2006 and 2015 reporting and transparency failings, and the fact that the FCA itself had directly communicated the importance of EMIR reporting requirements to firms in a number of ways. Mitigating factors were also identified. In particular, the FCA noted MLI's open and cooperative behavior in self-reporting its breaches and quickly planning remedial work in relation to its systems and controls.
MLI received a 30% reduction in the overall fine because it agreed to settle at an early stage in proceedings. Had it not agreed to settle, the penalty would have stood at just over £49.3m.
View the FCA's Final Notice.
