Merrill Lynch discovered a trading irregularity during a recent investigation of the troubled investment bank's London trading positions, the company said on Friday.
The trading issue, which Merrill did not quantify, was the latest black eye for the bank, which agreed to be acquired by Bank of America Corp
Merrill's net loss swelled to $15.84 billion in the fourth quarter amid big writedowns and investment losses on collateralized debt obligations and a variety of other risky securities.
Merrill said in a statement that it had informed regulators about the irregularity and was working with them to investigate.
Senior managers of the business are focused on the issue and believe the risks surrounding possible losses are under control, Merrill said in a statement in London.
The UK Financial Services Authority refused to comment on the matter.
Earlier on Friday, The New York Times reported that Bank of America was probing whether Merrill delayed booking trading losses until hefty bonuses were approved and the buyout deal was sealed.
Charlotte, North Carolina-based Bank of America is particularly concerned about the activities of a currency trader in London whose operations have come under scrutiny by British regulators, the newspaper said.
A Bank of America spokesman could not immediately be reached for comment.
Chief Executive Kenneth Lewis initially called the Merrill takeover the strategic opportunity of a lifetime.
But months later, Bank of America considered backing out of the deal as it became clear that Merrill's losses were soaring. The bank said U.S. regulators pushed it to complete the merger.
Bank of America's stock has sunk 75 percent since the deal closed on January 1. The largest U.S. bank by assets now faces many shareholder lawsuits over the acquisition.
In mid-January the bank received a government bailout to help it absorb losses on $118 billion of troubled assets. Since October it has accepted $45 billion of government aid.
New York Attorney General Andrew Cuomo is conducting a probe into $3.6 billion of executive bonuses awarded by Merrill just before the Bank of America deal was sealed.
(Additional reporting by Juan Lagorio in New York and Steve Slater in London, Editing by Dan Lalor and John Wallace)