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CFTC orders Morgan Stanley to pay 500,000 USD for supervision failures

First Published 29th September 2017

Firm's failure to implement and maintain adequate systems and procedures for reconciliation of exchange and clearing fees led to customer overcharges at times

Washington, DC - The Commodity Futures Trading Commission (CFTC) has issued an Order filing and simultaneously settling charges against Morgan Stanley & Co (MSCO) 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. MSCO is registered with the CFTC as a Futures Commission Merchant and a provisionally registered Swap Dealer.

The CFTC Order requires MSCO to pay a $500,000 civil monetary penalty and cease and desist from violating the CFTC Regulation governing diligent supervision.
The Order explains 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, the Order states.

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, the Order finds. Prior to 2010, 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.

However, the 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. According to the Order, 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.

The CFTC Order finds that, in aggregate, 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. MSCO has fully refunded nearly all of the affected customers and has otherwise taken responsibility for the relevant remaining amounts.

The Order states that, 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.