FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this notice the Authority hereby imposes on Merrill Lynch
International (“MLI”) a financial penalty of £34,524,000 for breaches of Principle 3
(management and control) of the Authority’s Principles for Businesses and Article 9
of the European Markets Infrastructure Regulation (“EMIR”) between 12 February
2014 and 6 February 2016 (“the relevant period”).

1.2.
MLI agreed to settle at an early stage of the Authority’s investigation. MLI
therefore qualified for a 30% (Stage 1) discount under the Authority’s executive
settlement procedures. Were it not for this discount, the Authority would have
imposed a financial penalty of £49,320,000 on MLI.

2.
SUMMARY OF REASONS

2.1.
The Authority has decided to take this action because during the relevant period
MLI contravened:

2.1.1.
Article 9 of EMIR, as it applies to exchange traded derivatives, by failing to
report 68.5 million transactions which were required to be reported under
that Article; and

2.1.2.
Principle 3 of the Authority’s Principles for Businesses by:

2.1.2.1. failing to have in place adequate oversight arrangements for the
reporting of trading in exchange traded derivatives under EMIR;

2.1.2.2. failing to undertake testing to ensure the completeness and
accuracy of the reports it was submitting for the purposes of its
obligations to report trading in exchange traded derivatives under
EMIR;

2.1.2.3. failing to allocate adequate and sufficient human resource to
undertake its obligations to report trading in exchange traded
derivatives under EMIR. This resulted in significant under-
resource between February 2014 and October 2014 and a lack of
appropriately experienced resource between February 2014 and
July 2015; and

2.1.2.4. failing to address issues it had identified within the risk
management systems applying to the reporting requirement in a
timely manner.

2.2.
The requirement to report trading in exchange traded derivatives was introduced
following the financial crisis in 2008 to improve transparency within financial
markets. Derivatives lack transparency as they create a complex web of
interdependence which can make it difficult to identify the nature of the risks
involved. EMIR required details of trading in such instruments to be centrally
reported and available to central authorities. This enabled such authorities to take
account of this information when assessing and addressing the risk inherent in
financial systems.

2.3.
The Authority considers MLI’s failings to be particularly serious given that:

2.3.1.
MLI has been subject to two previous Final Notices for transaction
reporting breaches;

2.3.2.
the reporting requirements introduced under EMIR were an important
component in addressing uncertainty around systemic financial risk,
caused by a lack of transparency. The FCA directly communicated the
importance of EMIR reporting requirements to firms in a variety of ways
including FCA website updates, the creation of an EMIR mailing list for
firms to sign up to and through which regular updates were circulated, the
implementation of roundtables with the main trade associations (ISDA,
FIA), seminars hosted by the FCA and seminars hosted by third parties at
which the FCA spoke; and

2.3.3.
the Authority has publicised a number of Enforcement actions taken in
relation to similar failings by other firms in relation to other categories of
transaction reporting.

2.4.
In determining an appropriate penalty the Authority also took account of:

2.4.1.
the resource MLI was targeting at addressing a crystallised risk in relation
to other forms of transaction reporting; and

2.4.2.
the issues faced by the trade repositories from a technology perspective in
the initial months following the introduction of EMIR.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

“the Act” means the Financial Services and Markets Act 2000

“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct Authority

“DEPP” means the part of the Authority’s handbook entitled Decision, Procedures
and Penalties Manual

“Derivative” means a financial instrument as set out in points (4) to (10) of Section
C of Annex I to Directive 2004/39/EC as implemented by Article 38 and 39 of
Regulation (EC) No 1287/2006

“Details Standards” means Commission Implementing Regulations EU No 148/2012
of 19 December 2012 supplementing EMIR with regard to the regulatory standards
on the minimum details of the data to be reported to trade repositories

“EEA” means the European Economic Area

“ESMA” means the European Securities and Markets Authority

“EMIR” means the European Markets Infrastructure Regulation (EU Regulation
648/2012 of the European Parliament and Council on over the counter derivatives,
central counterparties and trade repositories)

“ETD Reporting Requirement” means the reporting requirement set out in Article 9
of EMIR as it applies to exchange traded derivatives

“Exchange traded derivative” or “ETD” means a derivative, the execution of which
takes place on a regulated market

“Format and Frequency Standards” means Commission Implementing Regulations
EU No 1247/2012 of 19 December 2012 laying down the implementing technical
standards with regard to the format and frequency of trade reports to trade
repositories, according to EMIR

“Implementation date” means 12 February 2014, the date on which the obligations
under the ETD Reporting Requirement came into effect

“Implementation project” means the work undertaken by MLI between late
November 2013 and the implementation date to design the policies, procedures,
systems and controls to enable it to comply with its obligations under the ETD
Reporting Requirement

“MiFID” means the Markets in Financial Instruments Directive 2004/39/EC

“Regulated market” means a multilateral system operated and/or managed by a
market operator, which brings together or facilitates the bringing together of
multiple third-party buying and selling interests in financial instruments – in the
system and in accordance with its non-discretionary rules – in a way that results in

a contract, in respect of financial instruments admitted to trading under its rules
and/or systems, and which is authorised and functions regularly

“relevant period” means the period from 12 February 2014 to 6 February 2016

“SIAI” means a self-identified audit issue, which is an issue identified by business
units within MLI which are addressed through a formal internal process for
resolution

“Trade repository” means a legal entity which is registered with ESMA as able to
receive reports including those required under the ETD Reporting Requirement for
the purposes of EMIR Article 55 or 77

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber)

4.
FACTS AND MATTERS

4.1.
EMIR was signed on 4 July 2012. Under Article 9 of EMIR there was a requirement
to report specified details about derivative transactions to a trade repository. This
reporting requirement applied to a variety of derivative contracts, including
exchange traded derivatives. The implementation date for the ETD Reporting
Requirement was 12 February 2014.

4.2.
On 6 August 2013 ESMA submitted a recommendation to the European
Commission to delay the implementation date for the ETD Reporting Requirement
until January 2015. On 7 November 2013, the European Commission confirmed
that no delay would happen.

4.3.
The specification within Article 9 of EMIR meant that one ETD transaction might
trigger a requirement for multiple reports. For example, where MLI acted as an
intermediary for a client to transact on an exchange, MLI was required to make
separate reports for:

4.3.1.
its transaction with the client (“the client leg”); and

4.3.2.
its transaction with the exchange (“the market leg”).

Pre-implementation period at MLI

4.4.
EMIR and the obligations it imposed were under consideration at MLI from 2012
and throughout 2013. During this period, work on the ETD Reporting Requirement
comprised initial consideration of the systems which could be used to undertake
such reporting and the scenarios in which reporting might be necessary.
Representatives of MLI also attended meetings of industry bodies at which there
were discussions about preparations for
compliance with the ETD Reporting
Requirement, and conducted gap analyses around the fields that were required for
reporting. However, MLI did not fully resource the project to implement and
comply with the ETD Reporting Requirement until late November 2013, when it was
confirmed the implementation date would not be delayed.

4.5.
As a result MLI’s implementation project for the ETD Reporting Requirement was
undertaken in a very short timescale. Of particular note:

4.5.1.
ESMA Q&A Guidance on the ETD Reporting Requirement was published on
20 December 2013 and was used by MLI to inform its compliance with the
ETD Reporting Requirement;

4.5.2.
external resource was brought in to work on the design of the policies,
procedures, systems and controls, in part because there was a general
shortage of subject matter expertise. Knowledge of the specific MLI
environment was provided by ‘subject matter experts’ sourced from MLI’s
clearing operations team;

4.5.3.
the configuration of the trading data system used by MLI meant that the
market leg of ETD transactions was not recorded as a separate trade. It
therefore had to be artificially generated by MLI’s EMIR reporting system.
This required additional coding within the system and embedded data to
identify transactions which were subject to the ETD Reporting Requirement
and would require such synthetic generation; and

4.5.4.
the testing of the systems pre-implementation was conducted over a
shorter timescale than would usually be expected in projects of this
nature. It was undertaken primarily by the external project management
team, with support from business subject matter experts, and comprised
accuracy testing over samples of transaction data but did not include front
to back completeness testing.

4.6.
At the end of the pre-implementation period, the project management team had:

4.6.1.
designed a new joiners pack;

4.6.2.
produced task lists and allocated those to individuals; and

4.6.3.
produced an ongoing testing plan for the months immediately following
implementation.

The post implementation period

4.7.
The ETD Reporting Requirement took effect on 12 February 2014. MLI began
making reports to a trade repository on that date using the system that had been
designed during the pre-implementation period.

4.8.
At the date of implementation there was an error with a static data table within
MLI’s ETD reporting system. This meant that ETD transactions involving some
non-EU third party brokers were not being identified as requiring the generation of
a synthetic market side. As a result reports were not made to the trade repository
for that market side leg from the date of implementation, until the error was
identified and corrected in February 2016. This error resulted in 68.5 million
reports not being submitted over the two year period.

Allocation and type of personnel resource

4.9.
A request for additional resource to meet MLI’s obligations under the ETD
Reporting Requirement was submitted internally, pre-implementation, in mid-
January 2014 but was not approved until early March 2014. As a result, at
implementation the personnel resource allocated to undertaking the ETD Reporting
Requirement was less than 50% of the resource that had been projected as

required pre-implementation. Once the approval for the additional resource was
received, MLI had to undertake recruitment for those positions and therefore
remained under resourced for a period of time.

4.10. From April 2014 the personnel resource increased as MLI undertook recruitment.
Vacant positions were filled in July 2014, with the internally approved resourcing
levels ultimately reached in October 2014.

4.11. In January 2015 MLI identified that it required additional experience in transaction
reporting for the team undertaking the ETD Reporting Requirement. It therefore
began undertaking further recruitment, ultimately adding transaction reporting
expertise to that team in July 2015.

Oversight forums

4.12. On implementation, oversight of the operation of the ETD Reporting Requirement
resided with the business area responsible for day to day derivatives clearing.
Very shortly after implementation, MLI restructured the organisational oversight
lines for the ETD Reporting Requirement such that it became part of the same
business area with responsibility for MiFID.

4.13. As part of the revised organisational structure, the ETD Reporting Requirement
formed part of the standing agenda for a number of senior management and risk
reporting meetings. However, those meetings were not designed specifically to
assess or oversee MLI’s transaction reporting requirements and did not examine
MLI’s compliance with such requirements in detail.

4.14. In addition, in the weeks immediately following implementation the team
undertaking the day to day operation of the ETD Reporting Requirement were able
to bring issues identified to a ‘war room’ at which all requirements under EMIR
were considered. Further, by April 2014 a formal Operating Group had been
established. The Operating Group had two main purposes: to ensure MLI
understood the implications of implementing EMIR on all the MLI functions that had
been impacted; and that the team worked together to demonstrate metrics and
issues, or emerging issues within the EMIR obligations. A further purpose of the
Operating Group was to ensure a broad understanding of MLI’s obligations under
EMIR. The role of the Group was not, however, to perform a compliance function.
The Operating Group oversaw EMIR reporting only. It did not cover other forms of
regulatory reporting and, therefore, did not constitute a cross-report oversight
forum.

4.15. The ETD Reporting Requirement did not form part of a broader cross-regulatory
reporting oversight forum until January 2016 when MLI included it within the scope
of the Transaction Reporting Executive Forum, a committee with governance over
all of MLI’s regulatory transaction reporting requirements, including EMIR, and
comprised senior representation from transaction reporting business and support
groups.

Testing

4.16. From the implementation date there was no testing conducted in relation to the
ETD Reporting Requirement other than by the team performing its day to day
operation. This was something of which MLI was aware. In particular:

4.16.1. between 12 February 2014 to late May 2015 no pro-active testing was
undertaken in relation to the ETD Reporting Requirement. The only
monitoring in place during this period was:

4.16.1.1.
a daily ‘trade count’ done by the team undertaking the day
to day operation of the ETD Reporting Requirement;

4.16.1.2.
issues logs maintained on a daily basis by the team
undertaking the day to day operation of the ETD Reporting
Requirement recording issues identified during the conduct
of that day to day operation; and

4.16.1.3.
investigations of issues arising from messages received from
the trade repository about the compliance of MLI’s submitted
reports;

4.16.2. in late May 2015 a manual ‘pilot test’ was conducted of nine individual
trades to assess whether a proposed manual or automated testing
methodology was feasible. The test indicated that, in the very small
number of trades tested, data was being transferred and accurately
reported. However, given the number of trades on which the test was
performed it was not designed to, and did not adequately, mitigate the risk
that legs of trades were not being captured and accurately processed. It
simply demonstrated that a particular form of testing approach could be
applied to the ETD Reporting Requirement Processes;

4.16.3. no other manual or interim testing for the ETD Reporting Requirement
was undertaken until October 2015;

4.16.4. there was no automated testing in relation to the ETD Reporting
Requirement until February 2016; and

4.16.5. there was no adequate accuracy and completeness testing in relation to
the ETD Reporting Requirement until automated testing began in February
2016.

4.17. Throughout the relevant period, there was no dedicated testing personnel resource
allocated to the ETD Reporting Requirement by MLI. Instead the testing function
for the ETD Reporting Requirement was performed by persons who also had
responsibility for the day to day operation of the ETD Reporting Requirement.

Self-Identified Audit Issue

4.18. On 28 February 2014, a SIAI was opened by MLI (“the February SIAI”) and
identified that the relevant division of MLI “does not have governance and
oversight in place to determine the completeness, accuracy and timeliness of
regulatory reports”. During the course of the February SIAI the ETD Reporting
Requirement was identified as one of MLI’s high risk reports, which would be
subject to a deep dive review of its controls. As part of the February 2014 SIAI a
proposal was developed for this review and was to be taken forward as part of a
second SIAI. This was the only step taken to address the issue identified by the
February SIAI in relation to ETD Reporting Requirements.

4.19. On 19 December 2014, a further SIAI was opened by MLI consequent to the
February SIAI (“the December SIAI”). The audit issue identified was that ‘[The
GMO&MO division of MLI] does not have a robust [quality assurance] review
process in place to determine the accuracy of regulatory reports prepared by the
Middle Office and Operations teams.’

4.20. During the first four months of the December SIAI, the ETD Reporting Requirement
was again assessed as ‘high risk’ by MLI due to the significance attached to the
requirement. No substantive steps were taken to address this risk, however, until
May 2015. At this point the manual pilot test to assess the testing methodology
was conducted. This pilot test did not, however mitigate the risk that there were
breaches of the ETD Reporting Requirement already occurring for the reasons
described above.

4.21. As part of the final stage of the December SIAI a plan was formulated to roll out
testing for the ETD Reporting Requirement. This plan was prepared in August
2015, nine months after commencement of the December SIAI. Under the plan:

4.21.1. quarterly manual testing was to begin in September 2015, 19 months after
the Implementation Date; and

4.21.2. automated testing would not begin until late 2015/early 2016, almost two
years after the Implementation Date.

Monitoring delivery of this plan was not part of the December SIAI, which was
closed in October 2015.

Discovery of the non-reports

4.22. In October 2015, MLI began conducting manual testing of the ETD Reporting
Requirement. On 27 November 2015, the Authority raised a question with MLI
about the details of the reports being submitted to the trade repository. The query
resulted in MLI undertaking targeted testing over particular categories of reports.
It was through this targeted testing that it identified in January 2016 that reports
in relation to particular categories of transaction were not being reported as a
result of the error in the static data table. MLI reported this issue to the FCA on 9
February 2016.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex A.

Article 9 of EMIR

5.2.
Article 9(1) of EMIR requires that the counterparties to a derivative contract report
details related to the transaction to a trade repository. The details and types of
report required by Article 9(1) are set out in accordance with Article 9(5) of EMIR
in the Format and Frequency Standards and the Details Standards.

5.3.
MLI failed to make reports of details related to derivative contracts which were
required to be made under Article 9(1). Specifically, it failed to submit any report

in relation to a number of market facing transactions where those transactions took
place with certain non-EU brokers between 12 February 2014 and 6 February 2016.

5.4.
Principle 3 requires a firm to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.

5.5.
MLI breached Principle 3 because it failed to organise and control its affairs
responsibly and effectively with adequate risk management systems in relation to
its compliance with the ETD Reporting Requirement. This is because:

5.5.1.
MLI failed to allocate sufficient personnel resource to undertake the ETD
Reporting Requirement between 12 February 2014 and October 2014 and
was aware that there was insufficient allocated personnel resource;

5.5.2.
MLI failed to allocate personnel resource with the right level of EMIR
transaction reporting expertise between 12 February 2014 and July 2015
and was aware that there was insufficient allocated personnel resource,
although as mentioned above, there was a shortage of subject matter
expertise with respect to EMIR;

5.5.3.
MLI failed to conduct any appropriate testing to ensure the reports being
submitted in relation to the ETD Reporting Requirement between 12
February 2014 and October 2015 were complete and accurate. This was
10 months after it identified a need for testing in the December SIAI;

5.5.4.
the testing introduced by MLI in October 2015 was manual. It was not,
and MLI was aware that is was not, adequate to address the risk that the
reports submitted by MLI in relation to the Reporting Requirement were
complete and accurate;

5.5.5.
MLI failed, and was aware that it had failed, to conduct automated testing
of the completeness and accuracy of its ETD Reporting Requirement
reports between 12 February 2014 and January 2016. This was 14
months after the December SIAI identified the need for automated testing.
MLI, due to its previous Enforcement fine, intentionally prioritised the
implementation of automated testing for MiFID requirements ahead of
automated testing for the ETD Reporting Requirement. It was believed by
MLI that lessons learnt through MiFID automated testing could be applied
to the ETD Reporting Requirement and MLI was aware that this meant
commencing automated testing for the ETD Reporting Requirement was
delayed; and

5.5.6.
MLI implemented operating level oversight arrangements for the ETD
Reporting Requirement but the respective oversight forums did not review
MLI's compliance with the ETD Reporting Requirement in any detail. The
forums in place only provided updates on the day to day operation of the
ETD Reporting Requirement and did not review or examine MLI’s
compliance with the requirements in any detail. This was despite MLI
identifying the deficiencies in the structure of its oversight and testing
processes for the ETD Reporting Requirement in the February SIAI and
again in the December SIAI.

6.
SANCTION

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of
DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority
applies a five-step framework to determine the appropriate level of financial
penalty. DEPP 6.5A sets out the details of the five-step framework that applies in
respect of financial penalties imposed on firms.

Step 1: disgorgement

6.2.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the
financial benefit derived directly from the breach where it is practicable to quantify
this. The Authority has not identified any financial benefit that MLI derived directly
from its breach. Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.3.
For the purposes of Step 2, under DEPP 6.5A.2 the Authority considers that the
number of misreported or non-reported transactions is an appropriate indicator of
the harm or potential harm caused. In this instance the facts and matters which
constitute the breach of Principle 3 resulted in the breach of Article 9 of EMIR
continuing for an extended period of time. As such the Authority considers it
appropriate to levy one penalty in respect of both categories of breach.

6.4.
In addition the obligations imposed on firms in relation to EMIR are of a similar
nature and importance to those imposed under MiFID. As such the Authority has
considered the metric used in MiFID cases when determining what metric is
appropriate in relation to breaches of EMIR and necessary to achieve credible
deterrence.

6.5.
The Authority has, therefore, determined the appropriate basis figure at Step 2 to
be £102,750,000, by attributing a value of £1.50 to each of the transactions which
MLI failed to report as a result of the error in the data table.

6.6.
The Authority has determined the seriousness of MLI’s breaches to be Level 4 for
the purposes of Step 2 having taken into account:

6.6.1.
DEPP 6.5A.2G (6-9) which lists the factors the Authority will generally take
into account in deciding which level of penalty best indicates the
seriousness of the breach;

6.6.2.
DEPP 6.5A.2G (11) which lists the factors likely to be considered ‘level 4 or
5 factors’; and

6.6.3.
DEPP 6.5A.2G (12) which lists the factors likely to be considered ‘level 1, 2
or 3 factors’.

6.7.
Of these, the Authority considers the following factors to be relevant:

6.7.1.
the breaches are considered to be serious because they revealed
weaknesses in MLI’s procedures, management systems and internal
controls relating to the ETD Reporting Requirement;

6.7.2.
the breaches are considered serious as they were multiple, discrete events
which continued, in some cases, for significant time periods before
detection and remediation;

6.7.3.
senior management at MLI was aware that there was no automated testing
around the ETD Reporting Requirement as a result of the February 2014
and December 2014 SIAI and there was, therefore, a risk that issues

within the reporting system were not being identified. The matters
identified in the SIAIs were not progressed in a sufficiently timely manner;

6.7.4.
MLI did not make any profit or avoid any loss as a result of the breaches;

6.7.5.
there was no loss to consumers, investors or other market users;

6.7.6.
there was no potential significant effect on market confidence; and

6.7.7.
there is no evidence that the breach was committed deliberately or
recklessly.

6.8.
The Authority has applied the following percentages to the seriousness factors
considered at DEPP 6.5A.2(3):

6.8.1.
Level 1 – 0%

6.8.2.
Level 2 – 10%

6.8.3.
Level 3 – 20%

6.8.4.
Level 4 – 30%

6.8.5.
Level 5 – 40%

6.9.
The penalty calculation is therefore 30% of £102,750,000. The penalty figure after
Step 2 is therefore £30,825,000.

Step 3: mitigating and aggravating factors

6.10. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the
amount of the financial penalty arrived at after Step 2 to take into account factors
which aggravate or mitigate the breach.

6.11. The Authority considers that the following factors aggravate the breach:

6.11.1. the Authority had previously issued MLI with two Final Notices in respect of
transaction reporting failures. The breaches in each of the previous Final
Notices were similar in nature to the present breaches; and

6.11.2. the Authority directly communicated the importance of EMIR reporting
requirements to firms in a variety of ways.

6.12. The Authority considers that the following factors mitigate the breach:

6.12.1. in the initial months following the implementation of the ETD Reporting
Requirement, the ability of MLI to undertake adequate testing of the
systems related to that Requirement was impacted by issues with the data
it received from the trade repository;

6.12.2. MLI had begun to plan for remedial work in relation to its systems and
controls for the ETD Reporting Requirement. In particular it was intending
to use an automated testing solution developed for a different transaction
reporting obligation as a strategic solution for all its transaction reporting
obligations;

6.12.3. MLI self-reported the breaches of the ETD Reporting Requirement; and

6.12.4. MLI has co-operated fully with the Authority.

6.13. The Authority considers that once MLI had identified the breaches of Article 9 of
EMIR, the steps taken by MLI to rectify these breaches were taken efficiently and
welcomes MLI’s open and transparent approach in addressing the issues in this
Notice.

6.14. Having taken into account these aggravating and mitigating factors, the Authority
considers that the Step 2 figure should be increased by 60%. When considering
the percentage increase at Step 3, the Authority has principally had regard to MLI’s
failure to achieve acceptable standards of transaction reporting despite being
subject to previous Enforcement Action for similar failings.

6.15. Step 3 is therefore £49,320,000.

Step 4: adjustment for deterrence

6.16. Pursuant to DEPP 6.5A.4G, if the FCA considers the figure arrived at after Step 3 is
insufficient to deter the firm who committed the breach, or others, from
committing further or similar breaches, then the Authority may increase the
penalty.

6.17. The Authority considers that the Step 3 figure of £49,320,000 represents a
sufficient deterrent to MLI and others, and so has not increased the penalty at Step
4.

6.18. Step 4 is therefore £49,320,000.

Step 5: settlement discount

6.19. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to be
imposed agree the amount of the financial penalty and other terms, DEPP 6.7
provides that the amount of the financial penalty which might otherwise have been
payable will be reduced to reflect the stage at which the Authority and the firm
reached agreement. The settlement discount does not apply to the disgorgement
of any benefit calculated at Step 1.

6.20. The Authority and MLI reached agreement at Stage 1 and so a 30% discount
applies to the Step 4 figure.

6.21. Step 5 is therefore £34,524,000.

Financial penalty

6.22. The Authority therefore imposes a total financial penalty of £34,524,000 on MLI for
breaching Principle 3 of the FCA’s Principles for Businesses and Article 9 of EMIR.

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.
The following statutory rights are important.

Manner of and time for payment

7.3.
The financial penalty must be paid in full by MLI to the Authority by no later than 1
November 2017, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 2 November 2017, the
Authority may recover the outstanding amount as a debt owed by MLI and due to
the Authority.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this notice relates. Under these provisions,
the Authority must publish such information about the matter to which this notice
relates as the Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However, the Authority
may not publish information if such publication would, in the opinion of the
Authority, be unfair to MLI or prejudicial to the interests of consumers or
detrimental to the stability of the UK financial system.

Authority contacts

7.6.
For more information concerning this matter generally, contact Caroline Ryan
(direct line: 020 7066 3702) of the Enforcement and Market Oversight Division of
the Authority.

Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX

RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS AND
GUIDANCE

1.
RELEVANT STATUTORY PROVISIONS
1.1.
The Authority’s operational objectives established in section 1B of the Act
include the strategic objective to ensure that the relevant markets function
well and the operational objective to protect and enhance the integrity of the
UK financial system.

1.2.
Pursuant to section 206 of the Act, if the Authority considers that an
authorised person has contravened a requirement imposed on it by or under
the Act, it may impose on that person a penalty in respect of the
contravention of such amount as it considers appropriate.

2.
RELEVANT REGULATORY PROVISIONS
2.1.
In exercising its powers to impose a financial penalty and to impose a
restriction in relation to the carrying on of a regulated activity, the Authority
has had regard to the relevant regulatory provisions published in the
Authority’s Handbook. The main provisions that the Authority considers
relevant are set out below.

Principles for Businesses (PRIN)
2.2.
The Principles are a general statement of the fundamental obligations of firms
under the regulatory system and are set out in the Authority’s Handbook.
They derive their authority from the Authority’s rule-making powers as set
out in the Act and reflect the Authority’s statutory objectives.

2.3.
Principle 3 provides:

“A firm must take reasonable care to organise
and control its affairs
responsibly and effectively, with adequate risk management systems.”

European Markets Infrastructure Regulation (EMIR)
2.4.
The European Council agreed that there was a need to substantially improve
the mitigation of counterparty credit risk and that it was important to improve
transparency, efficiency and integrity for derivative transactions. EMIR
imposes requirements on entities that enter into any form of derivative
contract and requires entities that enter such contracts, amongst other things
to report every derivative that they enter into to a trade repository.

2.5.
EMIR Article 9 states:

“Counterparties and CCPs shall ensure that the details of any derivative contract
they have concluded and of any modification or termination of the contract are
reported to a trade repository registered in accordance with Article 55 or
recognised in accordance with Article 77. The details shall be reported no later
than the working day following the conclusion, modification or termination of the
contract.”

Decision Procedure and Penalties Manual (DEPP)

2.6.
Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out
the Authority’s statement of policy with respect to the imposition and amount
of financial penalties under the Act. In particular, DEPP 6.5A sets out the five
steps for penalties imposed on firms.

RELEVANT REGULATORY GUIDANCE

The Enforcement Guide

2.7.
The Enforcement Guide sets out the Authority’s approach to exercising its
main enforcement powers under the Act.

2.8.
Chapter 7 of the Enforcement Guide sets out the Authority’s approach to
exercising its power to impose a financial penalty.