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.
Dimon’s Vow
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.”