December 20, 2016

Morgan Stanley & Co. LLC will pay $7.5 million to settle charges it used trades involving customer cash to lower the firm’s borrowing costs in violation of the SEC’s Customer Protection Rule.  The Customer Protection Rule is intended to safeguard customers’ assets so that they can be promptly returned should the broker-dealer fail.  The SEC’s order found that from March 2013 to May 2015, Morgan Stanley had its affiliate Morgan Stanley Equity Financing Ltd. serve as a customer of its U.S. broker-dealer.  This allowed the affiliate to use margin loans from the broker-dealer to finance the costs of hedging swap trades with customers.  The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced the U.S. broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day.  According to the SEC’s order, the transactions violated the Customer Protection rule, which prohibits broker-dealers from using affiliates to reduce their customer reserve account deposit requirements.  SEC

Tagged in: Financial Institution Fraud, Market Manipulation and Trading Violations,