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Morgan Stanley pays fine after index hedge topped soymeal limits

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[March 25, 2014]  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.

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.

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Morgan Stanley had exceeded the limit on January 14, the agency said, and reduced its position on January 15, though it stayed above the limit. The position fell below the limit on January 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)

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