(Adds analyst comment, no comment from Morgan Stanley)
WASHINGTON/CHICAGO, March 24 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.
In November, the agency, which oversees swaps and futures
markets, issued a new version of the rule. The rule proposal has
already attracted well over 100 comment letters by industry
participants, and the agency is not expected to finalize the
rule before its new Chairman Tim Massad takes over.
Morgan Stanley had exceeded the limit on Jan. 14, the agency
said, and reduced its position on Jan. 15, though it stayed
above the limit. The position fell below the limit on Jan. 16,
the CFTC said.
The extended position limits "would expand the risk of and
the vulnerability to such sorts of actions," said Craig Pirrong,
a finance professor at the University of Houston, about the fine
against Morgan Stanley.
"The CFTC has been very aggressive on position limits issues
where it has the ability to do so, which is the ag commodities
right now," Pirrong said. The CFTC may be using enforcement
actions to signal to Congress that the agency is serious about
tackling speculative issues, he said.
The CFTC has taken action 13 times since late 2008 on
violations against speculative position limits, including the
latest fine against Morgan Stanley, according to the agency.
Commodity revenues fell nearly 40 percent at Morgan Stanley
last year, a second straight annual drop. The dwindling revenues
follow tighter restrictions on banks trading with their own
money and heightened public scrutiny of their role in the
natural resources supply chain.
(Reporting by Karey Van Hall and Douwe Miedema in Washington
and Tom Polansek in Chicago; Editing by Meredith Mazzilli)