R.J O’Brien fined $600,000 for post-trade allocation failures

The CFTC found that R.J O’Brien failed to detect and prohibit a post-trade allocation scheme run by one its clients.

Derivatives independent broker R.J O’Brien has been fined $600,000 by financial authorities in the US for several supervisory failures across its post-trade operations.

The Commodity Futures Trading Commission (CFTC) issued an order this week with the settlement charges and details of the failures that allegedly took place between January 2013 and January 2014.  

The order found that R.J O’Brien did not sufficiently supervise its staff to ensure that allocated bunched orders were processed correctly post-execution, and the allocations were not monitored for any unusual activity.

“Registrants stand as a first line of defence to prevent unlawful activity in our markets,” said James McDonald, director of the CFTC’s division of enforcement.

“The Commission expects these registrants to fulfil their duties to monitor transactions like those at issue here for suspicious activity.  This ensures that wrongdoers will be identified and swiftly held accountable.”

The failures, according to the CFTC, were spotted after one of R.J O’Brien’s clients carried out a post-execution trade allocation scheme which initially went undetected. The client allegedly allocated profitable trades to accounts where their associates had proprietary interest, while less profitable traders were allocated to the customer or pool account.

Several ‘red flags’ were raised indicating the client’s scheme, but R.J O’Brien failed to investigate the warnings or take any further action, the CFTC found. Furthermore, R.J O’Brien was issued with two regulatory actions from the National Futures Association (NFA) banning the client from withdrawing funds from accounts in a bid to stop the scheme.

The client was eventually banned from trading altogether but was still able to open a new account in a spouse’s name, in which R.J O’Brien then cleared trades that were executed. The CFTC highlighted that the failure to identify the relationship between the client and the spouse’s account demonstrated the broker’s insufficiency in policies and procedures for new accounts.

R.J O’Brien strenuously denies being involved in the scheme in any way and said it has since taken action to rectify processes and systems around post-trade allocation, and doubled its staff in legal and compliance in recent years.

“Our firm was in no way involved in the underlying misconduct identified in this matter by the NFA, as is clear from the NFA decision and CFTC Order,” R.J O’Brien said in a statement.

“RJO has diligently undertaken extensive efforts – particularly since the actions identified in the order – to invest in, and continually improve upon, our processes and systems. Among more than a dozen of the newest enhancements are detailed procedures developed with input from every department in the organisation, and clearly delineated responsibility for following through on these procedures; enhanced technology; a new account management system; and revised account maintenance policies.”