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Merrill Lynch transaction reporting fine – Could it have been avoided?

27th Oct 2017

News broke this week that Merrill Lynch has been fined £34.5million by the Financial Conduct Authority (FCA) for a failure to report various derivatives transactions over nearly two years. Only £34.5 million? Peanuts, you might say. Small potatoes given the gargantuan fines that banks have faced over the last few years – HSBC tops the league for the Mexican money laundering scandal at $1.9 billion. JP Morgan faced a hefty $920 million for the “London Whale” trading scandal.

First fine for transaction reporting failures for exchange traded derivatives

But the interesting thing about this story is that it’s the first enforcement action against a business for failing to report details of trading in exchange traded derivatives, since the European Markets Infrastructure Regulation legislation was brought in following the financial crisis. Merrill Lynch was found guilty of not accurately reporting 68.5 million exchange traded derivative transactions between February 2014 and February 2016. And the bank has had its wrists slapped twice before by the UK regulator for problems with its transaction reporting.


Performance is everything

The regulator has warned that fines related to failures in transaction reporting will start to spiral, as it starts to look more closely at the timeliness and accuracy of financial transaction reporting. The FCA has said that banks need to ensure their transaction reporting systems are “tested as fit for purpose, adequately resourced and perform properly.”

Presumably though, if banks and other financial institutions don’t have the requisite technology in place that will enable them to track transactions and pinpoint with accuracy, when an incident might have occurred, they are on the back foot. If they struggle to give the regulator the data they need, they are going to be liable and they’ll be slapped with a significant fine.


What can be done?

Obviously, it’s a massively complex issue. Banks have to be able to effectively track and analyse the transactions moving across an end-to-end trading or payment process. They face significant challenges because of the complexity of the trading environment, particularly where derivatives are concerned – they might be putting multiple systems together, a combination of in-house or third party systems.


Why independence is key…

An independent mechanism for tracking trades, something that sits above the trade flow, would give compliance and the business teams reassurance they are capturing daily activity. The benefit of an independent tool is that it can retrieve trade data immediately, correlate the complex trades and help generate the appropriate reports for the regulator without disrupting trade flow.


The upside of independent trade and order tracking is that if an incident were to happen, or a gap in reporting detected, the need to be able to quickly identify where the problem is, identify the transactions impacted and where the responsibility lies is available. It is only through having this insight can they put the fire out – being able to do this swiftly minimises the impact on cost, resource and client experience. Not to mention side stepping the iron fist of the regulator.


With MiFID II deadline just around the corner, the accuracy and timeliness of transaction reporting has never been more important. Because, when the regulator says jump, you will need to say how high. Without a failsafe transaction reporting function in place, you won’t stand a chance.

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