Morgan Stanley has suspended several traders after the US bank discovered faulty values had been used for emerging markets options contracts that could cost the bank up to $150m.
It is not clear how long the faulty pricing has been applied to the contracts, which people familiar with the matter said were linked to the Turkish lira, but that currency last experienced violent moves in March this year. The incident was first reported by Bloomberg.
The Financial Conduct Authority is aware of the issue, a person familiar with the matter said. The watchdog declined to comment.
It is unclear whether the so-called mismarking of the contracts represents faulty pricing models, or the deliberate actions of traders seeking to conceal losses. The bank is investigating the matter, but declined to comment.
Banks have suffered declining revenues from their options businesses this year, as volatility has proven stubbornly low. Two people familiar with the bank’s options business said Morgan Stanley remained very active in lira options even during jerky moves in the currency earlier this year. “One theory is that they made some losses in March and then hid them as they tried to make it back,” one of those people said.
Another said that this part of the bank’s business was highly speculative, rather than focused on fulfilling client needs, and that it valued aggressive risk-taking by staff. Several banks struggled with the snappy moves in the lira this March, and it can take months for losses on complex instruments to become clear.
Morgan Stanley’s fixed income, commodities and currencies division has outperformed peers in recent years, including a 21 per cent rise in revenues in the third quarter, when revenues at its closest rival Goldman Sachs, rose just 8 per cent. At the time, Morgan Stanley chief financial officer Jon Pruzan told the FT: “We feel very good about that business.”
Mr Pruzan and his colleagues have argued that the fixed income division’s performances validates a 2015 decision to scale back its activities and resources — including a 25 per cent cut in headcount — so that it could focus on its most profitable areas. Goldman Sachs is expected to unveil a similar approach at its January 29 investor day.