France fines Morgan Stanley for rigging bond market

Paris — Morgan Stanley has been fined €20m in France over accusations that its London desk used “pump and dump” tactics to rig bond prices after a bet on the French sovereign turned sour amid Greece’s debt crisis.

The enforcement committee of the Autorité des marchés financiers (AMF) said the bank manipulated the prices of 14 French bonds and eight Belgian bonds in June 2015. The lender also manipulated the price of futures on French debt, the AMF said in a statement on Tuesday.

“The seriousness of the infringements is also reinforced by the sophistication of the contentious transactions,” the French watchdog said. “The traders on the desk knew that on June 16  2015 there was high volatility and low liquidity in the market, which would necessarily increase the impact of their operations.”

At a hearing in November, AMF investigators said the bank’s London desk was long on French bonds and short on German debt, betting the yield spread would narrow. But the opposite scenario played out as the fallout from Greece’s impasse with creditors spread, causing the desk to lose $6m on June 15 2015, and another $8.7m when markets opened the next day.

To narrow its losses and avoid hitting a $20m loss-limit set by Morgan Stanley’s management, the London desk allegedly acquired futures on French bonds on June 16 2015, with the sole objective of increasing the market value of French and Belgian bonds before aggressively selling the latter. French and Belgian bonds are considered interchangeable, according to the AMF.

Morgan Stanley said it would appeal the penalty, which is the regulator’s joint-highest. Two years ago, Natixis Asset Management got a then-record €35m penalty from the AMF but the French bank’s unit won a €15m cut last month.

Market maker

“The activities in question were undertaken in accordance with market practice and as part of the firm’s role and obligations as a market maker, and Morgan Stanley remains confident that it has acted in the best interests of the market and its clients,” the bank said in a statement.

During the hearing, Stéphane Bénouville, a lawyer for the bank, said the accusations didn’t stand up to scrutiny, adding that fining Morgan Stanley would send a message that market makers aren’t allowed to hedge themselves and exit risky positions.

The contentious purchases of futures took place between 9.29am and 9.4am. Afterwards, Morgan Stanley traders on the London desk immediately sold French bonds for a total of €815m and Belgian bonds for €340m.

During the 15 minutes when Morgan Stanley bought futures on French debt, the price of the underlying 14 bonds sold immediately thereafter increased by 0.17% to 1.13%, according to the AMF. The underlying Belgian bonds rose between 0.22% and 1.39%.

Four minutes

The AMF enforcement committee said Morgan Stanley’s actions disrupted the MTS France electronic trading platform, suspending contributions from primary dealers for four minutes and reducing liquidity significantly for 50. Several complaints were lodged by market participants to France’s debt office, according to the AMF.

A spokesperson at Agence France Trésor said the debt agency is examining “possible consequences” after the AMF’s decision.

The Belgian Debt Agency said it is not considering any action against Morgan Stanley for something that was primarily related to France, adding that it’s not aware of any enforcement action from Belgium’s markets watchdog.

With Michael Hunter

Bloomberg