The world’s biggest bond dealers, including JPMorgan Chase & Co. (JPM) and Morgan Stanley, failed to properly report trades to the industry’s price-tracking system more than 11,000 times. JPMorgan’s penalty: About three minutes of its annual profit.
Fines levied in settlements disclosed last month by the Financial Industry Regulatory Authority amounted to a fraction of what the two New York-based firms generated from trading debt during the two-year reviews. JPMorgan’s $95,000 penalty was the biggest imposed by Finra as it cited at least three other dealers in the past five months for similar types of violations.
Regulators are seeking to uphold the integrity of the bond-price reporting system known as Trace, the biggest window into a market that’s grown about 78 percent since 2008 as investors poured money into debt securities. Holding back information on trades can give Wall Street dealers an advantage over customers seeking a fair price, undermining Finra’s stated goal of equal access for all participants to real-time data.
“If non-reporting is systemic, then that’s concerning because the broader market looks to this data as the golden source,” said Kevin McPartland, head of market-structure research at consulting firm Greenwich Associates. “It’s the best we’ve got when people try to understand who is doing what in the bond market.”
JPMorgan racked up the most Trace-related violations disclosed this year, the result of five separate reviews, according to a settlement released in April. The bank, which ranks as the biggest bond trader and top underwriter of corporate debt, neglected to post trades or missed deadlines in at least 6,300 instances from March 2010 through May 2012, at times omitting a quarter of required reporting, Finra said.
In one review, Finra found the violations accounted for almost 20 percent of the firm’s trades of new corporate bonds with other dealers that the bank was required to report over three months in 2011. In another, JPMorgan didn’t report 24 percent of new-issue offerings over five months, the regulator said.
Sometimes the bank didn’t report the correct volume, time or date of transactions, and the firm inadequately supervised compliance, according to the documents.
JPMorgan, whose companywide profit last year totaled almost $18 billion, accepted Finra’s $95,000 fine, the findings and a censure without admitting or denying the facts, according to the settlement. Finra is the industry’s self-regulatory body and is funded through members’ fees and fines.
Justin Perras, a spokesman for JPMorgan, declined to comment for this article and George Smaragdis, a Finra spokesman, wouldn’t address the conduct of specific firms. Finra’s agreements specify the banks won’t deny the findings or “create the impression” that the accord lacks a factual basis.
“Finra reviews the accuracy and timeliness of every single trade,” producing 125 enforcement actions related to Trace trade reporting in the past two years, Smaragdis said in an e-mailed statement. The reporting has improved as firms have become more automated, he said.
Dealers typically are required to report eligible corporate bonds to Finra within 15 minutes. As a group, they complied 98.3 percent of the time in the first three months of the year compared with 97.9 percent a year earlier, according to Finra. More than 90 percent of post-issuance corporate-bond trades are reported within five minutes of execution, Smaragdis said.
Morgan Stanley (MS), owner of the world’s largest brokerage, failed to report at least 4,200 trades on time from May 2011 through March 2013, resulting in $35,000 in Trace-related fines, according to documents released last month.
“The issues involved in this settlement were technical in nature and did not impair the accuracy of Trace data,” said Christy Jockle, a spokeswoman for Morgan Stanley.
Deutsche Bank AG (DBK), Germany’s biggest lender, had more than 1,400 Trace-related errors along with supervisory gaps, and the Frankfurt-based company agreed to a $55,000 penalty, according to Finra documents released in February and March.
Goldman Sachs Group Inc. (GS) had about 200 Trace violations and was fined $20,000, and Citigroup Inc. (C) had more than 180 incidents and was fined $60,000, Finra documents show. Both firms are based in New York.
Spokesmen for Goldman Sachs, Citigroup and Deutsche Bank declined to comment. Like JPMorgan and Morgan Stanley, the three firms consented to Finra’s censure without admitting or denying the findings.
The cases offer a view into Finra’s oversight of Trace, which was introduced in 2002 to bring transparency to the U.S. corporate debt market. Investors rely on the bond-price reporting system when deciding how much to pay for a security and evaluating the debt they own. If brokers omit or delay reports of falling prices, buyers may end up overpaying.
While the information helps smaller investors get better deals, brokers say it squeezes their profit margins and makes it harder to trade without tipping off rivals and clients.
In the 90 days following Trace’s full implementation, variations among competing quotes shrank 8.5 percent, according to Massachusetts Institute of Technology and Harvard University researchers in a study last year. Finra plans to start disseminating prices on about $1.5 trillion of additional corporate bonds starting on June 30, and has received approval to start publishing pricing on asset-backed securities.
Finra’s guidelines on sanctions call for measures that “should be designed to deter future misconduct and improve overall business standards,” with penalties that are “more severe for recidivists.”
Like other Wall Street banks, JPMorgan has been previously censured by Finra for failing to report bond trades. The bank paid about $200,000 in settlements announced February 2010 and June 2011.
Spurred by $23 billion of expenses for an array of other legal and regulatory accords last year, Chief Executive Officer Jamie Dimon has made a priority of ensuring the firm complies with rules, assigning thousands of people to plug any holes.
“We’ve taken some of our best people and we’ve given them command-and-control authority, we’ve staffed them up, and we’re going to fix every single last one of them,” Dimon, 58, told investors almost a year ago, before the latest Finra accords were disclosed.
Some of the omissions by Finra members probably were caused by human error and technological mishaps. Still, the penalties aren’t big enough to deter traders who see opportunities to profit by withholding data from clients, said Mark Williams, a former Federal Reserve bank examiner who teaches risk management at Boston University.
“It’s an easy trade-off to make because there’s no teeth in the enforcement,” Williams said. “If you’re a big trading house with large positions and the leniency to not report, and that gives you an advantage, you’ll take it.”
(An earlier version of this story corrected the description of JPMorgan trades that were cited by Finra.)