Morgan Stanley pays fine after index hedge topped soymeal limits

Mon Mar 24, 2014 5:05pm EDT
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WASHINGTON/CHICAGO (Reuters) - Morgan Stanley has agreed to pay $200,000 to settle civil charges it exceeded speculative position limits in soybean meal futures for two days while attempting to hedge a commodity index investment, U.S. regulators said on Monday.

The fine, while small, highlights how tougher rules meant to apply tighter speculative trading limits in other raw material markets, such as oil and metals, risk curtailing banks' business in selling broad commodity baskets to investors, one of the most lucrative niches of the industry over the past decade.

Morgan Stanley Capital Group's trading on the Chicago Board of Trade in January 2013 exceeded the all-months speculative position limit established by the regulator, according to the U.S. Commodity Futures Trading Commission.

Its position "consisted of net long positions held by its commodity index desk to hedge its financial exposure" to the Dow Jones-UBS Commodity Index and to the holdings of the firm's other trading desks, according to the CFTC.

A Morgan Stanley spokesman declined to comment.

Wall Street banks had benefited over the past decade from a surge of some $400 billion of investor capital into raw material markets, much of that plowed into basic passive, buy-and-hold index baskets. However, over the past few years institutional interest has waned, money has flowed out of the sector and many investors want more dynamic products.

Meanwhile new trading rules also threaten to cast a pall over the business, with the CFTC making a second effort to apply position limits on a wide range of commodity markets.

Position limits have long been used in agricultural markets to curb speculation, but Congress gave the CFTC far greater power to impose them after the financial crisis. The agency will now extend them to oil, natural gas and metals markets.

In 2012, a judge knocked down a version of the new rule after Wall Street banks challenged it in court, fearing they would incur high costs because the banks needed to tally up the positions across hundreds of subsidiaries.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on a building in San Diego, California September 24, 2013. REUTERS/Mike Blake