Morgan Stanley fined RM92mil for rigging French bond markets

PARIS: Morgan Stanley was fined €20mil (RM92.2mil) by French regulators after the bank’s London desk was accused of using “pump and dump” tactics to manipulate sovereign bond prices.

The enforcement committee of the Autorite des Marches Financiers (AMF) said the bank manipulated the prices of 14 French government bonds and eight Belgian bonds in June 2015. The lender also manipulated the price of a French government bond futures contract, the AMF said in a statement yesterday.

“The seriousness of the infringements is also reinforced by the sophistication of the contentious transactions conducted by the traders, ” the French watchdog said. “The traders on the desk knew that on June 16,2015 there was high volatility and low liquidity on the market, which would necessarily increase the impact of their operations.”

At a hearing last month, AMF investigators said the bank’s London desk was long on French bonds and short on German debt, betting the yield spread would narrow.

But the opposite scenario played out as the fallout from Greece’s impasse with creditors spread, causing the desk to lose US$6mil on June 15,2015, and another US$8.7mil when markets opened the next day.

To narrow its losses and avoid hitting a US$20mil loss-limit set by Morgan Stanley’s management, the London desk allegedly acquired futures on French bonds on June 16,2015, with the sole objective of increasing the market value of French and Belgian bonds before aggressively selling the latter. French and Belgian bonds are considered interchangeable, according to the AMF.

Bank to appeal

Morgan Stanley said it would appeal the decision.

“The activities in question were undertaken in accordance with market practice and as part of the firm’s role and obligations as a market maker and Morgan Stanley remains confident that it has acted in the best interests of the market and its clients, ” the bank said in a statement.

During the hearing, Morgan Stanley said it “absolutely and categorically rejects the AMF’s allegations.” Stephane Benouville, a lawyer for the bank, said the accusations didn’t stand up to scrutiny and added that fining Morgan Stanley would send a message that market makers aren’t allowed to hedge themselves and exit risky positions.

The contentious purchases of futures took place between 9:29 am and 9:44 am and immediately after Morgan Stanley traders on the London desk then sold French bonds for a total of €815mil and Belgian bonds for €340mil. — Bloomberg