Morgan Stanley’s forex trading department has run afoul of its forex control procedures. Although the global bank has failed to publicly acknowledge the problem, inside sources have spread the work that four FX traders have been suspended until further notice, due to their concerted effort to conceal anywhere from $100 to $140 million in forex trading and option losses. The group of four appears to have mis-marked the value of options and other forex related securities in emerging market currencies from trades emanating from both its New York and London offices.
Major global banks are heavily dependent on the profits delivered by their respective forex trading departments, but even after the great rate fixing scandal where the giants in the industry were fined enormous sums of money, somewhere north of $6 billion by several different regulatory agencies, the ability to control the actions of their traders remains suspect even to this day. The financial crisis of a decade back was another example of misconduct, but banks treat fines as a mere cost of doing business. Any corrective actions or clampdowns would necessarily impact profitability adversely.
In May of 2015, ForexFraud reported:
The Department of Justice, the Federal Reserve and other U.S. and European authorities and regulators said corporate units of Citicorp(C), JPMorgan Chase (JPM), London-based Barclays (BCS) and Royal Bank of Scotland (RBS) acknowledged their traders rigged foreign exchange prices of U.S. dollars and euros from Dec. 2007 to Jan. 2013.
UBS was also handled separately, but the chief executives for all five banks committed to new control procedures. Morgan Stanley, however, was not one of the original five, but may have had issues, too.
The nature of the problem at Morgan Stanley had to do with “mis-marking”. As reported by the Japan Times and Bloomberg:
In so-called mis-marking, the value placed on securities doesn’t reflect their actual worth. The scope of the probe at Morgan Stanley includes currency options that give buyers the right to trade at a set price in the future, enabling them to both speculate and hedge against potential losses. Morgan Stanley’s currency options desk has struggled this year amid a slump in the volatility that generates profits for traders, even in the more unruly emerging markets, according to a person with knowledge of the performance.
Morgan Stanley is in the midst of conducting an internal probe into the deliberate entry of incorrect data into its control software by the four traders in question, Scott Eisner and Rodrigo Jolig, both operating out of London, and two senior New York-based colleagues, Thiago Melzer and Mitchell Nadel. The London duo handled the Central and Eastern Europe, Middle East and Africa currency book, while Melzer and Nadell split up the duties for emerging markets and macro trading in the Americas, respectively.
Volatility in currency markets has been on decline during 2019. Low inflation and the fact that central bank policymakers have taken a slow and easy approach to normalization have resulted in calmer forex markets. The average volatility for the major currencies over the past two decades has been roughly 9%, but the set has languished in the 5% to 6% area. The Bank for International Settlements did note a brief spike in April dealings in foreign-exchange options of 16 percent to $294 billion per day, but the ability to make profits in forex trading has been limited for months on end.
Morgan Stanley was not alone last week, as for reported trade room problems. The Bank of England fined the London-based office of Citicorp £44 million ($57 million) “for years of inaccurate reporting to regulators about the lender’s capital and liquidity levels”.
Angela Gallo, a finance lecturer at Cass Business School, commented to Bloomberg:
The probe shows the amount of effort still needed in these large organizations to reduce episodes of misconduct. The frequency of misconduct cases in the U.S. and Europe in recent years speaks very loudly that more fundamental changes are required.
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Morgan Stanley relieves four FX traders for hiding $140 million in losses was first posted on December 2, 2019 at 12:00 pm.