In another Wall Street misdeed, Morgan Stanley settles oil-trading flap

McClatchy NewspapersApril 29, 2010 

WASHINGTON — In another black eye for Wall Street, the Commodity Futures Trading Commission late Thursday announced a $14 million fine against Morgan Stanley Capital Group Inc. for allegedly hiding its complex oil trades.

The settlement, in which Morgan Stanley did not admit or deny the accusations, comes as oil prices have continued their steady upwards march and have some oil analysts again saying that excessive speculation is again pushing up energy prices. One recent estimate put the cost of that to consumers and businesses at $300 billion annually.

In an announcement after U.S. markets had closed, the CFTC said that a trader from Morgan Stanley conspired on Feb. 6, 2009, with a counterpart from Swiss financial firm UBS Securities to hide from authorities a prohibited trading activity.

The CFTC said Morgan Stanley was on the other end of a deal with a client of UBS. Morgan Stanley was looking to buy more than 33,000 March-dated contracts for future delivery of oil and sell the same quantities of April contracts for oil. The two parties agreed to a deal in which they’d settle on a price after trading had finished for the day_ something called a Trade at Settlement agreement.

The problem, said regulators, is that Morgan Stanley asked its unidentified business partner, the UBS client, to not disclose the special trade until after oil trading had settled that day. The law requires immediate notification to the New York Mercantile Exchange, where oil is traded.

In similar past cases, these sorts of charges by the CFTC have involved a practice called “banging the close.” That involves traders dumping large volumes of contracts right before the close of trading in an attempt to manipulate the settlement price. When large numbers of contracts are trading hands, a slight change in prices can net millions of dollars in ill-gotten gains.

The CFTC declined to comment on whether Morgan Stanley and its counterpart were trying to manipulate the closing price, or why such a steep fine was issued for a single violation. UBS was hit with a fine of just $200,000. The agency declined to tell McClatchy whether the fine reflected a larger pattern of violation.

Although the $14 million settlement is small by the huge numbers now tossed around on Wall Street, the CFTC announcement adds to a public image problem for the nation’s biggest banks.

Morgan Stanley is active in the trading of contracts for the future delivery of oil, but it’s also very active on the unregulated “dark markets” where two private parties enter into huge bets on what happens to oil prices. And it’s also active in the physical market where oil actually changes hands.

Critics believe Wall Street speculation drives up oil prices by creating false impressions of tight supplies, and by using investor money, often from pension funds, to take buy-and-hold positions in oil contracts as if they were stocks to be held with the anticipation of price gains.

“We believe the current high oil prices are caused by speculation, not market fundamentals, as oil supply is more than adequate to satisfy current and future demand, which is expected to remain weak. However, we expect crude oil prices to remain inflated until regulators curb trading in oil futures by financial speculators, mainly the large investment banks and their hedge and pension fund clients,” Fadel Gheit, an oil analyst with Oppenheimer & Co. Inc. in New York, who thinks oil should be trading at $60 a barrel, not Thursday’s settle price of $85.17.

Gheit, whose estimate of the cost to consumers is $146 billion annually, said the profits from this speculation “helped fund obscene bonuses at large banks.”

In a poll released this week by the Reuters news agency, some of the biggest names in the oil sector said they think speculators are costing consumers upwards of $300 billion annually. Reuters said it surveyed more than 40 top figures in the oil sector and that 73 percent of them believed today’s oil prices do not reflect actually supply and demand fundamentals but speculation.

Legislation to revamp financial regulation is making its way through the Senate and by year’s end, the markets for complex and secretive trading of oil contracts and other financial instruments by Wall Street firms is expected to become more transparent.

Separate from that effort, the CFTC is also seeking to limit the total number of oil contracts that financial investors can hold.

ON THE WEB

Morgan Stanley order

Oppenheimer report

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