01 Jun 2009, David Benyon, Operational Risk & Regulation
LONDON - The UK Financial Services Authority (FSA) has fined Morgan Stanley £1.4 million for systems and controls failings after a rogue-trading incident last year. Matthew Piper, previously a proprietary trader at the bank, forced the US investment firm to take a $120 million loss on its books last June when he deliberately mis-marked positions he traded on behalf of the bank and hid losses by manipulating monitoring processes. Morgan Stanley admitted to its negative adjustment on June 18, 2008.
The FSA's penalties include a personal fine for Piper of £105,000. The trader is also banned from working in "any regulated activity on the grounds that he is not a fit and proper person".
The regulator said Morgan Stanley failed to employ the systems and controls it had in place to deal with illiquid financial products. The bank also failed to supervise Piper's books and consequently did not price positions accurately. The FSA said the bank then failed to respond quickly enough to changing conditions in credit markets - increased volatility and decreased liquidity - making no adjustments to existing systems and controls that might have allowed it to prevent or detect the mis-marking at an early stage.
Morgan Stanley's co-operation with the FSA meant the fine was reduced from an original £2 million. The firm commissioned a review in response to the failure, which identified serious systems and controls weaknesses.
That review now seems to have paid dividends. The FSA announced on May 20 that Morgan Stanley had uncovered a second rogue trading case, on the freight desk of its London commodities division. David Redmond traded freight and oil on the ICE Futures (Europe) trading platform. On February 6, 2008, he concealed a short position overnight and traded on it the next day, exposing the bank to the risk of significant loss.
The FSA said the bank discovered the position, then suspended and dismissed Redmond. The regulator has banned Redmond from any regulated activity, stating: "The FSA makes no criticisms of Morgan Stanley or any other individuals at the firm in this case. Morgan Stanley promptly identified and investigated the issue and took swift action against Redmond."
"Firms must take care to allocate sufficient resources to supervise adequately those activities they choose to undertake. Where a firm fails to act accordingly the FSA will take action against the firm," said FSA enforcement director Margaret Cole in response to the fines. "Firms must take care to ensure their traders operate within a proper control environment. Financial instruments must be priced correctly by traders, particularly in more challenging conditions and when it comes to illiquid products."
The Financial Services Authority made a further announcement on May 26 that a third Morgan Stanley trader, Nilesh Shroff, has been banned and fined £140,000 for 'pre-hedging' trades without clients' consent between June and October 2007. The regulator explained that it had no criticism of Morgan Stanley in the case and that the bank had fired Shroff in December 2007 after completing its own internal investigation.
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