The bank discovered in May 2008 that Matthew Piper, a credit trader on the bank's prop trading team, had failed to mark down his portfolio of credit derivatives, reportedly options on the Markit CDX credit index, as rising volatility and falling liquidity affected their value.
Piper was the bank's only market-maker in these products, and his books were not independently supervised, the FSA said, adding there was no clear line of supervision. In addition, a stress test introduced in November 2007 to make up for the lack of other valuation "was inadequate, wrongly applied and inaccurately described". The bank also failed to pay attention to complaints by counterparties that products were being wrongly valued.
Morgan Stanley benefitted from paying the fine early - it would otherwise have been £2 million, the FSA said. Piper was also fined £105,000 and banned from regulated financial activity for "deliberate misconduct", including mismarking and attempting to conceal the mismarks. The mismarking existed "for approximately five months", the FSA said.