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CFTC Levies $200 Million Fine Against JP Morgan for Oversight Failures

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The Commodity Futures Trading Commission (CFTC) issued an order on Thursday, May 23, 2024, simultaneously filing and settling charges against J.P. Morgan Securities LLC, a registered futures commission merchant and swap dealer, for inadequate supervision of its business operations as a CFTC registrant. This failure led to J.P. Morgan’s inability to capture billions of orders in its surveillance systems.

This comes after the commercial bank’s Australian subsidiary, J.P. Morgan Securities Australia Limited, was hit with a $775k fine following ASIC investigation for permitting suspicious client orders to be placed on the futures market, ASX 24.

J.P. Morgan admitted to the facts outlined in Sections II.C.2 (Scope of Surveillance Data Gaps) and 3 (Causes of Surveillance Data Gaps) of the order, acknowledging that its conduct violated CFTC regulations in those sections. However, the firm neither admits nor denies the findings of fact.

As per the order, J.P. Morgan is required to pay a $200 million civil monetary penalty (CMP), cease and desist from further violations of the CFTC’s supervision requirements, and adhere to specified conditions and undertakings. The order stipulates that the CMP obligation will be offset by $100 million from any payment made pursuant to resolutions with JPMorgan Chase Bank, N.A. and JPMorgan Chase & Co. concerning surveillance gaps by the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System, respectively.

Director of Enforcement Ian McGinley remarked, “Today’s resolution includes a significant penalty, certain factual admissions, and the appointment of a consultant to ensure remediation. We hope it sends a clear message that CFTC registrants must take appropriate steps to ensure, through testing and other means, that complete trade and order data direct from exchanges are being ingested into trade surveillance systems and that orders are being surveilled.”

According to the order, in 2021, during the onboarding process of a new trading exchange, J.P. Morgan discovered operational issues with its surveillance of trading on multiple venues and trading systems, resulting in gaps in trade surveillance. These gaps stemmed from the failure to configure certain data feeds, leading to incomplete ingestion of trade and order data by J.P. Morgan’s surveillance tools.

On a specific U.S. designated contract market, J.P. Morgan failed to ingest billions of order messages from 2014 through 2021, primarily consisting of sponsored access trading activity for three significant algorithmic trading firms. J.P. Morgan claims that the surveillance gaps were fully rectified by 2023.

While J.P. Morgan had a quarterly reconciliation process in place to ensure the completeness of some order and trade data ingested into certain surveillance systems, the firm did not subject direct-from-exchange data feeds to this process. This omission was based on the erroneous assumption that data directly from an exchange was from a “golden source” and thus did not require testing.

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