The US Securities and Exchange Commission has issued Morgan Stanley with a $5 million penalty, citing violations of Regulation SHO, the regulation governing short sales. “Morgan Stanley hedged synthetic exposure to swaps by purchasing or selling the securities referenced in the swaps, and it separated its hedges into two aggregation units—one holding only long positions, and the other holding only short positions,” said the SEC. Morgan Stanley was therefore able to sell its hedges on the long swaps and mark them as “long” sales without concern for Reg SHO’s short sale requirements.
Morgan Stanley neither admitted nor denied the findings, but has accepted the fine and consented to a cease-and-desist order. Separately, the bank also this week received a $5 milion fine from the Commodity Futures Trading Commission for failing to comply with swap data reporting obligations.