Morgan Stanley Places Four Traders on Leave in Wake of FX Probe

Motivated to conceal the estimated trading losses from Morgan Stanley, the scope of the probe includes FX options.

Morgan Stanley has reportedly dismissed, or placed on leave, four currency traders after being caught out trying to conceal significant trading losses. The move comes amid investigations by the US bank into alleged charges that they exaggerated the performance of the FX options desk.

A Bloomberg report identified two London based traders – Scott Eisner and Rodrigo Jolig – and two senior New York-based colleagues, Thiago Melzer and Mitchell Nadel, who were running emerging-markets desk and macro trading in the Americas.

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The alleged scheme was designed to make investors believe that the bank’s business linked to emerging-market currencies was doing much better. In fact, the suspected mismarking cost Morgan Stanley between $100 million and $140 million in losses.

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The so-called mismarking presents an opportunity for fraud. It simply misleads investors and executives about how much their investments are worth, and thus mispresent performance while allowing traders to charge higher fees. The US regulators have aggressively targeted valuation or “mismarking” fraud in a number of indictments brought within the last few years.

Morgan Stanley strengthens FX business

Motivated to overvalue their positions to conceal the estimated trading losses from Morgan Stanley, the scope of the probe mainly focuses on FX options, which give holders the right to buy or sell currencies at an agreed price and time. Options volumes surged to nearly $300 billion a day, according to the Bank for International Settlements’ latest survey, mirroring a pick-up in the spot market and reflecting strong trends in OTC sectors.

Like other big banks, Morgan Stanley has been strengthening its foreign exchange desks, investing in people and technology. The focus on forex and flow business comes as investor appetite grows for such products after a market meltdown last year saw demand wane for riskier derivatives. Last year, the US investment bank made a $15 million investment in foreign exchange (FX) technology and trading platform provider, Integral.

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