Morgan Stanley Probes Alleged Mismarking in Currency Trading

Morgan Stanley MS is conducting a probe into possible mismarking of securities related to emerging market currencies by its traders. Per Bloomberg, citing people with knowledge of the matter, the Wall Street giant asked four of its traders to leave, suspecting that they tried to conceal losses of $100-$140 million by mismarking securities.

Notably, mismarking refers to the practice in which the value that is placed on a security does not reflect its actual worth.

Scott Eisner, Rodrigo Jolig, Thiago Melzer and Mitchell Nadel are the traders, who are part of the investigation.

Eisner, based in London was given the responsibility to manage orders for the Central and Eastern Europe, Middle East and Africa currency book, known as CEEMEA.

Melzer, based in New York, was managing foreign exchange and emerging-markets Americas trading, while Nadel, who is also a colleague based in New York, was given the responsibility to run macro trading in the Americas, including rates and currencies.

Per people with knowledge of the matter, who asked not to be identified as the matter is not public yet, the ultimate employment status of these traders are not yet known. However, at least some of them will be asked to leave the bank.

The scope of the probe being conducted by Morgan Stanley includes currency options as well. In options, traders try to speculate or hedge against potential losses by trading at a set price in the future.

One of the persons with knowledge of the matter said that Morgan Stanley booked some of the losses in the third quarter of 2019.

Notably, trading income, which is largely dependent on the overall performance of the capital markets, constitutes almost 35% of Morgan Stanley’s net revenues. While solid client activity and significant market volatility aided the company’s trading revenues in 2018, the trend reversed in 2019, which hurt its non-interest income to some extent.

This is not the first case of trading misconduct, which has been carried out by any bank. Various other banks in the past have been fined with huge sums of money for trading malpractices.

In August, The Toronto-Dominion Bank TD and Royal Bank of Canada RY were accused of being involved in forex-trading malpractices. It was alleged that traders of the banks shared confidential customer information with other participants in chatrooms to gain potential advantage in foreign exchange transactions that took place between 2011 and 2013.

Also, recently, Citigroup C got embroiled in legal issues related to its reporting to regulators. The Wall Street biggie was penalized by the Prudential Regulation Authority (“PRA”), the Bank of England’s (“BoE”) banking supervisory arm, for inaccurate reporting to regulators related to its capital and liquidity levels for years.

So far this year, shares of Morgan Stanley have gained 25.5%, outperforming the industry’s growth of 18.3%.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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