Morgan Stanley & Co. LLC has agreed to pay $7.5 million to settle charges that it used transactions involving customer cash to lower its borrowing costs.
The SEC said Morgan Stanley & Co. violated the Customer Protection Rule by using transactions with Morgan Stanley Equity Financing Ltd., an affiliate of Morgan Stanley, to reduce the amount it was required to deposit in its customer reserve account.
From March 2013 to May 2015, Morgan Stanley Equity Financing, acting as a customer of the broker/dealer, used margin loans to finance the costs of hedging swap trades with customers. The margin loans reduced the borrowing costs incurred to hedge these trades and reduced the company's customer reserve account deposit requirements by "tens to hundreds of millions of dollars per day," the SEC said.
Without admitting or denying the findings, Morgan Stanley & Co. agreed to be censured and to take remedial steps to improve its compliance with the rule. The company also significantly increased the amount of excess funds in its customer reserve account.