The Financial Industry Regulatory Authority (FINRA) today fined Merrill Lynch $1.4 million for failing to establish a reasonable supervisory system and procedures to identify and evaluate extended settlement transactions, and for related rule violations. Extended settlement transactions have a longer time between trade and settlement than routine securities transactions, and therefore involve an extension of credit and exposure to counterparty, credit and market risk. Merrill allegedly failed to collect adequate margin to offset this risk, improperly extended credit to cash-account customers, and miscalculated its outstanding margin and net capital, according to LeapRate.com. This misconduct occurred from April 2013 until June 2015, and Merrill’s customers engaged in extended settlement transactions with notional values of hundreds of millions of dollars across numerous firm product lines. Merrill’s supervisory system, including written supervisory procedures, was not reasonably designed to identify and evaluate extended settlement transactions for compliance with margin and net capital rules. The bank also improperly extended hundreds of millions of dollars of margin credit in numerous retail customer’s cash accounts. These are all against securities rules.
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