J.P. Morgan Agrees to Pay $200M to Settle CFTC Charges of Supervisory Failure

J.P. Morgan Securities has agreed to pay $200 million to settle charges by the Commodity Futures Trading Commission that the firm did not diligently supervise its business, which resulted in the failure to capture billions of orders in its surveillance systems.

According to an order issued by the CFTC, J.P. Morgan said that while it was implementing a new trading exchange in June 2021 that it discovered its surveillance of trading on multiple venues and trading systems was not operating correctly. The firm said this led to significant gaps in its surveillance of order and trade data, which dated back to 2014 in some cases and affected at least 30 global trading venues.

“For many years, JPM failed to capture in its surveillance systems billions of orders on a particular venue,” the CFTC said in its order.

The regulator said that while J.P. Morgan had in place a quarterly reconciliation process designed to ensure the completeness of some order and trade data ingested into certain surveillance systems, it did not subject direct-from-exchange data feeds to that reconciliation process. The CFTC said this was based on “an erroneous assumption that data directly from an exchange was from a ‘golden source’ and thus did not need to be tested.”

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The CFTC said that some of the surveillance gaps were the result of configuration issues that led to the firm failing to ingest direct-from-exchange order and trade data into a third-party surveillance system that J.P. Morgan began using to conduct futures trade surveillance around 2014. The regulator added that J.P. Morgan claims the surveillance gaps were fully remediated by 2023.

“Reliance on critical third-party service providers offers no defense to regulatory violations,” CFTC Commissioner Kristin Johnson said in a statement. “When relying on a third-party to provide critical front-and back-office services or trade surveillance, a registrant remains responsible for compliance with the Commission’s regulations.”

In addition to the monetary penalty, the settlement requires J.P. Morgan to cease and desist from further violations of the regulator’s supervision requirements and to comply with conditions and undertakings specified in the order, which includes the appointment of a compliance monitor.

“We self-identified the issue, significant remedial actions have been taken and others are underway; and we have not found any employee misconduct or harm to clients or the market in our review of the previously uncaptured data,” J.P. Morgan said in an emailed statement. “We do not expect any disruption of service to clients as a result of these resolutions.”