American giant Merrill Lynch International (MLI) has been fined £34,524,000 by the Financial Conduct Authority (FCA) for failing to report 68.5 million exchange traded derivative transactions between 12 February 2014 and 6 February 2016. This failure represents a breach of Principle 3 (Management and Control) of the FCA’s Principles for Businesses and Article 9 of the European Markets Infrastructure Regulation (“EMIR”). The fine was reduced by 30% from the original amount of £49.3m because the bank was open and cooperative and agreed to settle at an early stage.
This is the first enforcement action against a firm for failing to report details of trading in exchange traded derivatives under EMIR, which came into force in 2012 to reduce risk in the derivatives market. The reporting requirement was one of the key reforms introduced following the financial crisis in 2008 to address the inherent risk in financial systems and improve transparency within financial markets. This fine reflects the importance the FCA puts on this type of reporting as a key aspect of their supervisory function and on the expectation that firms have proper transaction reporting systems.
Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said “Effective market oversight depends on accurate and timely reporting of transactions. …We will continue to take appropriate action against any firm that fails to meet requirements.”
What happened to MLI should lead other regulated firms to question whether their reporting systems are sufficient. What will happen with the larger MiFIR and transaction reporting requirements? What lessons can be learned from the MLI failure?
The FCA are likely to have zero tolerance for reporting failures since correct data is essential to their monitoring and detection of market abuse and their global oversight function to protect consumers and financial markets.