CFTC ACTION: Morgan Stanley and UBS

The CFTC announced the separate filings and simultaneous settlements of charges against Morgan Stanley Capital Group, Inc. and UBS Securities Inc. in connection with Morgan Stanley concealing from the New York Mercantile Exchange the existence of a large Trade at Settlement (TAS) block crude oil trade and UBS Securities aiding and abetting that concealment.

The CFTC orders require that Morgan Stanley pay a $14 million civil monetary penalty and UBS pay a $200,000 civil monetary penalty.

The CFTC orders find that, in early February 2009, a Morgan Stanley trader and a UBS broker discussed an opportunity for Morgan Stanley to act as a counterparty to a third-party UBS customer to purchase a block of March 2009 crude oil futures contracts and to sell a block of a similar quantity of April 2009 contracts on the NYMEX. The price of the two legs of the trade was to be determined later by the market closing price, an arrangement known as a Trade at Settlement block trade.

The order finds that, on February 6, 2009, prior to the trade being finalized, the Morgan Stanley trader requested that the UBS broker not report the TAS block trade until after the close of trading. The UBS broker agreed to this arrangement. At around mid-day on February 6, 2009, Morgan Stanley and UBS, on behalf of its customer, entered into the TAS block by which Morgan Stanley purchased 33,110 March 2009 NYMEX Light Sweet Crude Oil futures contracts and sold 33,110 April 2009 NYMEX Light Sweet Crude Oil futures contracts. Per their agreement, the UBS broker then did not report the existence of the TAS block trade until 2:37 pm, after the market closed, according to the order.

The CFTC order further finds that Morgan Stanley’s and UBS’s actions concealed the occurrence of the trade from the NYMEX, contrary to NYMEX Rule 6.21C(6), which provided that the “buyer and seller must ensure that each block trade is reported to the Exchange within five minutes of the time of execution.”

In addition to the civil monetary penalties, Morgan Stanley agreed for the next three years to 1) notify all Morgan Stanley traders of significant new and modified trading rules; 2) administer a yearly enhanced training program regarding CFTC and exchange trading rules for all appropriate Morgan Stanley employees and 3) implement, within 90 days, enhanced surveillance of TAS block trades on the NYMEX.

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