U.S. Markets open in 6 hrs 37 mins

Morgan Stanley Ousts FX Traders as It Probes Concealed Loss

Stefania Spezzati, Donal Griffin and Viren Vaghela

(Bloomberg) -- Morgan Stanley fired or placed on leave at least four traders over an alleged mismarking of securities that concealed losses of between $100 million and $140 million, according to people with knowledge of the matter.

The firm is investigating the suspected mismarking, which was linked to emerging-market currencies, said the people, who asked not to be identified as the details are private. Tom Walton, a spokesman for the New York-based bank, declined to comment.

The traders who have been identified as part of the probe include Scott Eisner and Rodrigo Jolig, both based in London, and two senior New York-based colleagues, Thiago Melzer and Mitchell Nadel, the people said. Eisner, Jolig, Melzer and Nadel didn’t respond to requests for comment. Their ultimate employment status isn’t yet clear, but at least some of them are leaving the bank, the people said.

Melzer was given responsibility for foreign exchange and emerging-markets Americas trading in March, while Nadel runs macro trading in the Americas, including rates and currencies. Eisner was managing orders for the Central and Eastern Europe, Middle East and Africa currency book, known as CEEMEA, according to his LinkedIn profile.

In so-called mismarking, the value placed on securities doesn’t reflect their actual worth. The scope of the probe at Morgan Stanley includes currency options that give buyers the right to trade at a set price in the future, enabling them to both speculate and hedge against potential losses. Dealing in foreign-exchange options surged 16% to $294 billion per day in April, according to the most recent data from the Bank for International Settlements.

Morgan Stanley’s currency options desk has struggled this year amid a slump in the volatility that generates profits for traders, even in the more unruly emerging markets, according to a person with knowledge of the performance. The JPMorgan Global FX volatility index trades at the lowest since the summer of 2014.

Third Quarter

The Wall Street firm booked some of the losses in the third quarter, one of the people said. Morgan Stanley reported a 21% increase in overall fixed-income trading revenue, a result that was “partially offset by a decline in foreign exchange,” according to its third-quarter earnings presentation.

The probe shows “the amount of effort still needed in these large organizations to reduce episodes of misconduct,” said Angela Gallo, a finance lecturer at Cass Business School. “The frequency of misconduct cases in the U.S. and Europe in recent years speaks very loudly that more fundamental changes are required.”

It has been a turbulent week for securities firms in London and New York after Citigroup Inc. was fined 44 million pounds ($57 million) by the Bank of England for years of inaccurate reporting to regulators about the lender’s capital and liquidity levels. The incidents point to weak internal controls at investment banks a decade on since the financial crisis.

Natixis SA, the French lender roiled by risk-management problems since last year, has suspended a senior trader at a subsidiary in New York pending an internal investigation, Bloomberg News reported this week.

Officials at the French bank are reviewing issues around how some of the senior trader’s transactions have been recorded, the people said. The bank is also examining how he managed his portfolio of trades, they said, requesting anonymity as the details aren’t public.

(Updates with additional details in final paragraph.)

--With assistance from Silla Brush.

To contact the reporters on this story: Stefania Spezzati in London at sspezzati@bloomberg.net;Donal Griffin in London at dgriffin10@bloomberg.net;Viren Vaghela in London at vvaghela1@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Dale Crofts

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.