Finra fines Merrill Lynch $1.4 million over extended settlement transactions
Regulator said non-standard trades led to firm miscalculating net capital.
The Financial Industry Regulatory Authority Inc. has fined Merrill Lynch $1.4 million for failing to establish a reasonable supervisory system and procedures in connection with extended settlement transactions, and for related rule violations.
Unlike most securities transactions that now settle on a trade-date-plus-two-day schedule, extended settlement transactions have a longer time between trade and settlement, and therefore involve an extension of credit, Finra said, exposing firms to counterparty, credit and market risk.
As a result of its supervisory deficiencies, Finra said that Merrill Lynch failed to collect adequate margin to offset this risk, improperly extended credit to cash-account customers, and miscalculated its outstanding margin and net capital.
Finra found that from at least April 2013 through June 2015, many Merrill Lynch customers engaged in extended settlement transactions with notional values of hundreds of millions of dollars across numerous firm product lines. Despite the prevalence of these transactions, the firm’s supervisory system was not reasonably designed to identify and evaluate extended settlement transactions for compliance with margin and net capital rules, Finra said.
As a result, Merrill Lynch’s computation of margin requirements and net capital deductions for tens of thousands of extended settlement transactions was inaccurate, resulting in margin rule and net capital violations, as well as inaccurate books and records and FOCUS Report filings.
Finra also found that the firm improperly extended hundreds of millions of dollars of margin credit in numerous retail customers’ cash accounts, in violation of Regulation T. These transactions should only have been permitted in margin accounts, not in customer cash accounts.
In settling this matter, Merrill Lynch neither admitted nor denied the charges, but consented to the entry of Finra’s findings.
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