[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
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 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
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
(Reporting by Karey Van Hall and Douwe Miedema in Washington and Tom
Polansek in Chicago; editing by Meredith Mazzilli)