The CFTC charged the firm with not having "adequate systems and procedures” for reconciling exchange and clearing fees, which led to customer overcharges.
The CFTC has settled charges against Morgan Stanley & Co. LLC, for “failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on the CME Group, ICE Futures US, and other exchanges.”
Headquartered in New York City, Morgan Stanley & Co., or MSCO, is a limited liability company, which is also registered with the commission as a futures commission merchant and a provisionally registered swap dealer.
MSCO is a “wholly owned subsidiary of Morgan Stanley Domestic Holdings, Inc. … MSDHI is a wholly owned subsidiary of Morgan Stanley Capital Management, LLC, which is a wholly owned subsidiary of Morgan Stanley (the ‘Ultimate Parent’),” according to MSCO’s June 30, 2017 consolidated statement of financial condition.
The CFTC order requires MSCO to pay a $500,000 civil penalty and to “cease and desist from violating the CFTC regulation governing diligent supervision.”
In all, according to the CFTC, “between 2009 and April 2016, MSCO overcharged customers in the United States $1,550,182 in connection with transactions on various exchanges, and customers of a MSCO affiliate were overcharged $1,439,047 in connection with transactions on various exchanges.’
According to the commission, “nearly all” of the affected customers have been fully refunded and MSCO has “otherwise taken responsibility for the relevant remaining amounts.”
For its part, MSCO neither admits nor denies any of the CFTC’s “findings or conclusions.”
The CFTC notes that “customer transactions executed on exchanges are subject to payment of exchange and clearing fees that are applied to each transaction in the normal course of business. Clearing firms such as MSCO receive invoices for these fees from the exchange clearinghouses, which the firms pass on to their customers.”
Specifically, the CFTC charges that MSCO “failed in certain respects to implement and maintain adequate systems and procedures for reconciling exchange and clearing fees from at least 2009 through April 2016.”
Prior to 2010, according to the commission, MSCO “recognized the need to ensure that the increasingly complex structure for exchange fees was managed by dedicated personnel using automated systems, and MSCO developed and began implementing a proprietary automated system to identify, process, and reconcile exchange fees.”
The problem, according to the CFTC, was that “development, design, and implementation of MSCO’s automated system failed to account for, and protect against, the risk of overcharging customers for exchange and clearing fees,” and “for a substantial majority of the relevant period, MSCO had no automated system in place to detect instances where it may have overcharged customers for exchange fees.”
MSCO’s automated system generated three kinds of overcharges, according to the CFTC.
“The first category of overcharges took place over a period of approximately two years, between October 2012 and September 2014, when MSCO erroneously imposed an additional $2 per contract charge on certain block trade transactions executed on ICE Futures US and cleared on ICE Futures Europe….
“The second category of overcharges took place over a period of years dating to 2009, when MSCO erroneously overcharged certain customers for ‘give-up’ transactions on the Chicago Futures Exchange … Italian Derivatives Market … and Osaka Securities Exchange.…
“The third category of overcharges involved a set of overcharges dating to 2011. MSCO had miscoded the customer rules for e-mini index option transactions on the CME, specifically by failing to pass on a lowered rate imposed by the exchange in or around 2011.”
Beginning in early 2015, MSCO “modified an automated process in its proprietary fee system to directly identify potential overcharges, and MSCO represents that this functionality should prevent future overcharges,” the CFTC says.
The commission also notes that “this is the fourth action the CFTC has brought concerning a clearing firm’s supervisory failures in connection with fee processing.”
Other commission actions regarding fee-processing supervisory failures include the following:
- In August 2014, the CFTC ordered Merrill Lynch, Pierce, Fenner & Smith Inc. to pay a $1.2 million penalty relating to is processing of futures exchange and clearing fees charged to customers.
- In August 2016, the CFTC ordered Barclays Capital, Inc. to pay an $800,000 penalty relating to its processing of futures exchange and clearing fees charged to customers.
- And in January 2017, the CFTC ordered J.P. Morgan Securities, LLC, which had self-reported the violations, to pay a $900,000 penalty relating to its faulty process for reconciling exchange fees.
FTF News contacted Morgan Stanley, the parent company, for comment about the CFTC’s contentions regarding MSCO. By press time, there had been no response.
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