WASHINGTON — A key financial regulator said Wednesday that it had fined Wall Street powerhouse Merrill Lynch $350,000 for violating rules that limit how many speculative contracts it can hold in markets where bets are made on the price of cotton for future delivery.
The Commodity Futures Trading Commission said that Merrill Lynch Commodities Inc., a subsidiary of Bank of America, repeatedly had violated limits on how many Cotton No. 2 futures contracts it was allowed to hold. Futures are bets on where the price of a given commodity will be for future delivery.
In a technical news release, the agency said Merrill Lynch Commodities had violated a prohibition "against trading in excess of speculative position limits." The violations reportedly occurred from Jan. 31 to Feb. 3. In the commission's order, made public Wednesday, the agency said Merrill Lynch Commodities was notified that it had exceeded speculative limits on Feb. 1, Feb. 2 and Feb. 3, and didn't come into compliance until Feb. 4.
Houston-based Merrill Lynch Commodities was found to be hundreds of contracts over its speculative limits in the categories of "all months" and "single month." The most egregious example came Feb. 1, when the firm was 1,059 contracts over its 5,000 "all months" limit.
Analysts contend that a $350,000 fine is hardly a deterrent for Merrill Lynch Commodities. It's well below the $12 million the commission levied on Dairy Farmers of America Inc. and its former CEO Gary Hanman in December 2008 for market manipulation and violating speculative limits. Merrill Lynch Commodities doesn't disclose its revenues, but its parent company, Merrill Lynch & Co., listed physical commodity assets valued at $447 million as of Sept. 30 in a recent regulatory filing.
"When fines are so low that they can be viewed as just a cost of doing business, that's no deterrent at all. We have to have meaningful fines and penalties against bad actors, not only in the wake of illegal behavior, but also to deter future illegal conduct," Bart Chilton, a CFTC commissioner, said in a statement to McClatchy. "I have pushed our agency to utilize its full enforcement authorities aggressively to these ends, and this is also why I've called for giving this agency criminal authority. I want our agency to be able ... to get to the heart of the crimes quickly."
Currently, the commission must recommend any potential criminal prosecution to the Justice Department for a decision, and Justice hasn't made prosecuting Wall Street crimes a priority. Wednesday's case involved a settlement in which Merrill Lynch agreed to pay the fine but didn't admit or deny the commission's findings.
"We're pleased to resolve this matter. This was unintentional, and to prevent a reoccurrence in the future we have strengthened our position-limit monitoring system," Bill Halldin, a Bank of America Merrill Lynch spokesman, told McClatchy.
The settlement announcement comes as the CFTC is trying to impose tougher limits on how many contracts Wall Street players can hold — so-called position limits. Merrill went far over its legal limit under the existing rules, which Congress ordered last year to be tightened.
Last Friday, two powerful Wall Street trade associations — the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association — filed a joint lawsuit trying to block the new tougher limits from taking effect.
The CFTC's case also comes amid a bipartisan funding battle. The Obama administration sought $308 million for the commission in the fiscal year 2012 budget. Congress is looking to fund the agency at $205 million, virtually no increase.
"Not funding the CFTC is like taking the police off the streets in a high-crime area, which is what Wall Street is," said Dennis Kelleher, the president of Better Markets, an advocacy group that favors tighter regulation and transparency in financial markets. "Risky trading in dark markets is highly profitable to Wall Street and very expensive for every other person in America. They got billions in bonuses, and we got the bill for trillions of dollars to clean up their mess. The only way to prevent them from doing that again is to make sure that the CFTC has the funds to do their job."
A McClatchy investigation published Nov. 30 found that murky data camouflaged Wall Street speculation in the cotton market. When the CFTC began publishing new broad data in September 2009, it showed that financial speculators with no intent ever to take delivery of cotton held 61 percent of all contracts, and now hold in the range of 50 to 60 percent.
Historically, speculators have held about 30 percent of futures contracts in most commodities. Better Markets and other advocacy groups argue that this influx in speculative money has distorted the futures market and pushed up prices, hurting end users and consumers.
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