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Morgan Stanley to Settle CFTC Issue

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On Tuesday, Morgan Stanley (MS - Free Report) reached a settlement with The Commodity Futures Trading Commission (CFTC) to pay $5 million for violating the future trading rules. The rules require the firms to execute trades only on exchanges, otherwise those will be considered fictitious sales.

However, Morgan Stanley & Co. LLC, a wing of Morgan Stanley, carried out several off-exchange futures trades to minimize consumers’ risk and reported these to the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) as exchanges for related positions (EFRPs), thereby violating the Commodity Exchange Act (CEA).

For this, the company is required to pay an extra sum of $1.75 million to the CME and CBOT. According to CFTC, the fine to be paid by Morgan Stanley should deter the company from further violating the CEA.

As per CFTC, all the Eurodollar and Treasury Notes future contract trades carried out from April 2008 to October 2009 by Morgan Stanley & Co. LLC, which is a registered futures commission merchant (FCM), were noncompetitive and unlawful. CFTC also stated that these were carried out without having any equivalent cash or Over the Counter (OTC) derivative positions.

Moreover, CFTC has accused Morgan Stanley of having ill-equipped administrative and internal controls that failed to detect this fraudulent trading and its dubious designation as EFRPs. The company was also accused of failing to overview its employees’ conduct regarding the same.

The CFTC has pointed out that the customers were unharmed and trades were not quoted at irrational prices because of these fictitious sales. However, this regulatory body took stringent measures against the violation as it threatened the price discovery and transparency principles on which the future trade laws are based.

The officials at Morgan Stanley commented that the company had co-operated with the CFTC and is satisfied to have reached a settlement.


We believe that the settlement of such claims does give the banking giant a sense of relief as this will enable it to concentrate more on its core activities. However, these settlements do affect a company’s financials and reputation. Moreover, involvement in fraudulent trading will affect investors’ confidence in the stock to an extent.

Currently, Morgan Stanley retains its Zacks #3 Rank, which translates into a short-term Hold rating. One of its peers, Bank of America Corporation (BAC - Free Report) also retains a Zacks #3 Rank.

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