Washington, D.C. – Morgan Stanley & Co. LLC has been ordered to pay a $5 million penalty for fraudulently reporting trades to the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT), the U.S. Commodity Futures Trading Commission (CFTC) announced on June 5, 2012.
The CFTC found that between April 18, 2008, and October 29, 2009, Morgan Stanley unlawfully executed and reported numerous off-exchange futures trades as Exchange for Related Positions (EFRPs). These trades were deemed “fictitious sales” because they were executed non-competitively and lacked the necessary corresponding cash or over-the-counter (OTC) derivative positions required for legitimate EFRPs.
According to the CFTC order, Morgan Stanley failed to adhere to the legal requirements for EFRPs, which allow trades to be executed off-exchange but require accurate reporting to an exchange afterward. The firm’s supervisory systems and internal controls were deemed inadequate, as the Futures Operations department responsible for reporting EFRPs did not verify the existence of related cash or OTC positions. No other department within Morgan Stanley was tasked with this verification either.
Furthermore, the CFTC determined that Morgan Stanley did not ensure its employees understood the requirements for bona fide EFRPs and lacked sufficient surveillance systems to identify improperly designated trades. The firm also failed to consistently designate trades as EFRPs on all relevant documentation.
David Meister, Director of the CFTC’s Division of Enforcement, emphasized the importance of accurate reporting, stating, “The laws requiring that futures trades be executed on an exchange serve important price discovery and transparency principles…when an FCM reports that it properly conducted an off-exchange futures trade as part of an EFRP, that report had better be accurate.”
The order acknowledges Morgan Stanley’s cooperation with the investigation. The firm is required to cease and desist from further violations of the Commodity Exchange Act (CEA) and CFTC regulations.
Source: CFTC.gov
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