September 28, 2017
CFTC Orders Morgan Stanley & Co. LLC to Pay $500,000 for Supervision Failures
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) today issued an Order filing and simultaneously settling charges against Morgan Stanley & Co. LLC (MSCO), a Delaware limited liability company headquartered in New York City, 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.
This is the fourth action the CFTC has brought concerning a clearing firm’s supervisory failures in connection with fee processing:
• In August 2014, the CFTC ordered Merrill Lynch, Pierce, Fenner & Smith Inc. to pay a $1.2 million penalty relating to is processing of futures exchange and clearing fees charged to customers (see CFTC Press Release 6984-14, August 26, 2014),
• In August 2016, the CFTC ordered Barclays Capital, Inc. to pay an $800,000 penalty relating to its processing of futures exchange and clearing fees charged to customers (see CFTC Press Release 7419-16, August 4, 2016), and
• In January 2017, the CFTC ordered J.P. Morgan Securities, LLC, which had self-reported the violations, to pay a $900,000 penalty relating to its faulty process for reconciling exchange fees (see CFTC Press Release 7511-17, January 11, 2017).
The CFTC Division of Enforcement staff members responsible for this case are Elizabeth N. Pendleton, Joseph Patrick, Susan Gradman, Brigitte Weyls, Scott Williamson, and Rosemary Hollinger.
Last Updated: September 28, 2017