The Securities and Exchange Commission announced settling charges against Morgan Stanley & Co. LLC for violations of Regulation SHO, the regulatory framework governing short sales.
According to the US regulator, the structure of Morgan Stanley’s prime brokerage swaps business resulted in violations of Reg SHO. The SEC stated that Morgan Stanley hedged synthetic exposure to swaps by purchasing or selling the securities referenced in the swaps. The financial services company separated its hedges into two aggregation units – one holding only long positions and the other holding only short positions. Morgan Stanley was able to sell its hedges on the long swaps and mark them as “long” sales disregarding the Reg SHO’s short sale requirements.
The SEC further stated that Morgan Stanley’s “long” and “short” units failed to qualify for a Reg SHO exception permitting broker-dealers to establish aggregation units as they were not independent and did not have separate trading strategies. The Commission found that the units had identical management structures, locations and business purposes, as well as the same strategy or objective.
