Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. MERRILL LYNCH & CO., INC. (65100) 10-Q published on Aug 02, 2013 at 4:38 pm
Reporting Period: Jun 29, 2013
On April 16, 2012, Ambac Assurance Corp. and the Segregated Account of Ambac Assurance Corp. (together, "Ambac") sued First Franklin Financial Corp., Bank of America, N.A., MLPF&S, Merrill Lynch Mortgage Lending, Inc., and Merrill Lynch Mortgage Investors, Inc. in New York Supreme Court, New York County. Plaintiffs' claims relate to guaranty insurance Ambac provided on a First Franklin securitization (Franklin Mortgage Loan Trust, Series 2007-FFC). The securitization was sponsored by a Merrill Lynch entity, and certain certificates in the securitization were insured by Ambac. The complaint alleges that defendants breached representations and warranties concerning the origination of the underlying mortgage loans and asserts claims for fraudulent inducement, breach of contract and indemnification. The complaint does not specify the amount of damages sought.
On July 1, 2013, the Commission announced that it had addressed a Statement of Objections (“SO”) to Banc of America Securities LLC (a predecessor to MLPF&S), Bank of America and a related entity (together, the “Bank of America Entities”); a number of other financial institutions; Markit Group Limited; and the International Swaps and Derivatives Association (together, the “Parties”). The SO sets forth the Commission's preliminary conclusion that the Parties infringed EU competition law by participating in alleged collusion to prevent exchange trading of credit default swaps and futures. According to the SO, the conduct of the Bank of America Entities took place between August 2007 and April 2009. As part of the Commission's procedures, the Parties will be given the opportunity to review the evidence in the investigative file, respond to the Commission's preliminary conclusions, and request a hearing before the Commission. If the Commission is satisfied that its preliminary conclusions are proved, the Commission has stated that it intends to impose a fine and require appropriate remedial measures. However, given the early stage of this matter it is not possible to estimate the amount of any fine or what remedial measures may be required.
The staff of the DOJ has advised that it intends to file civil charges against Bank of America Securities LLC (a predecessor to MLPF&S) and other Bank of America entities arising from one or two jumbo prime securitizations. The staff of the SEC has advised that they intend to recommend civil charges concerning one of those securitizations. The staff of the NYAG has advised that they intend to recommend filing an action against Merrill Lynch arising from their RMBS investigation. In addition, the staff of the SEC has advised that it is considering recommending civil charges against Merrill Lynch arising from its CDO investigation. Merrill Lynch has been in active discussions with senior staff of each government entity in connection with the respective investigations and to explain why the threatened civil charges are not appropriate.
Pursuant to the Financial Reform Act and subsequent Commodity Futures Trading Commission ("CFTC") rulemaking, we have registered certain of our subsidiaries as swap dealers with the CFTC and we may need to register additional entities as swap dealers or major swap participants as a result of the CFTC's July 2013 final cross-border guidance discussed below. Upon registration, swap dealers and major swap participants become subject to certain CFTC rules, including measures regarding clearing and exchange trading of certain derivatives, new capital and margin requirements, additional reporting, external and internal business conduct, swap documentation and portfolio compression and reconciliation requirements for derivatives. Most of these requirements, with the exception of margin, capital and exchange trading, have gone into effect, except with respect to swaps between our non-U.S. swap dealers and non-U.S. branches of Bank of America, N.A. with certain non-U.S. counterparties. Swap dealers are now required to clear certain interest rate and index credit derivative transactions when facing all counterparty types other than corporate counterparties and third-party subaccounts and, after September 9, 2013, will be required to clear all such interest rate and index credit derivative transactions, unless either counterparty qualifies for the “end-user exception” to the clearing mandate. These products will also become subject to exchange trading requirements beginning in the fourth quarter of 2013. The timing for margin implementation remains unknown. The Financial Reform Act and subsequent rulemaking by the Office of the Comptroller of the Currency also require Bank of America, N.A. to "push out" certain derivatives activity to one or more non-bank affiliates, including, potentially, Merrill Lynch and Co., Inc. and affiliates, by July 2015.
Our net revenues for the six months ended June 30, 2013 were $12.7 billion compared with $9.9 billion in the six months ended June 30, 2012. The increase primarily reflected higher principal transactions and investment banking revenues and lower net interest expenses, partially offset by lower other revenues. Principal transactions revenues were $4.0 billion for the six months ended June 30, 2013, an increase of $2.3 billion from the prior year period. The increase included the impact of higher revenues associated with the valuation of certain of our liabilities. In the six months ended June 30, 2013, we recorded net gains of $12 million due to the impact of the widening of Merrill Lynch's credit spreads on the carrying value of certain of our long-term debt liabilities, primarily structured notes, as compared with net losses of $2.2 billion recorded in the prior year period due to the narrowing of our credit spreads. We also recorded gains from DVA of $3 million in the six months ended June 30, 2013 as compared with DVA losses of $770 million in the six months ended June 30, 2012. These increases in principal transactions revenues were partially offset by lower fixed income trading revenues, particularly in our credit, commodity and mortgage product businesses. Investment banking revenues were $2.8 billion and increased 26% from the prior year period, primarily reflecting higher underwriting fees from both debt and equity issuances. Net interest expense was $98 million in the six months ended June 30, 2013 compared with $969 million in the prior year period. The fluctuation was primarily due to higher net interest revenues generated from our trading activities, as well as lower financing costs. Other revenues were negative $274 million in the six months ended June 30, 2013 compared with positive $1.0 billion in the prior year period. Other revenues for the six months ended June 30, 2013 included a charge of approximately $450 million to write-down a receivable from MBIA, Inc., as well as a loss of $71 million associated with certain initial costs incurred with the sale of our IWM business. Other revenues for the six months ended June 30, 2012 included gains of $405 million resulting from the repurchase and retirement of certain of our long-term borrowings and a gain of $145 million from the sale of an office building.