Morgan Stanley to pay $7.5M for customer cash violation

A broker-dealer subsidiary of financial services company Morgan Stanley will pay $7.5 million to settle allegations it used trades involving customer cash to lower its borrowing costs, a federal regulator said Tuesday.

The transactions, executed from March 2013 to May 2015, violated a customer protection rule designed to safeguard cash and securities so they can be promptly returned to clients in case the broker-dealer failed, said the Securities and Exchange Commission.

"Complex trading schemes designed to artificially reduce the amount a broker-dealer must maintain in its customer reserve account run contrary to these basic obligations," Michael Osnato, a SEC enforcement official, said of the rule violation.

The broker-dealer, Morgan Stanley & Co. LLC, neither admitted nor denied the allegations, but agreed to pay the civil penalty, accepted a censure and said it would avoid any future violations.

A SEC order showed that the broker-dealer had an affiliate called Morgan Stanley Equity Financing also serve as a customer. That business relationship enabled the affiliate to use margin loans from the broker-dealer to finance costs of hedging swap trades with other customers.

The margin loans reduced borrowing costs incurred to hedge the swap trades, and lowered the broker dealer's customer reserve account requirements by millions of dollars per day, the SEC said.

Follow Paste BN reporter Kevin McCoy on Twitter: @kmccoynyc