Morgan Stanley shifts derivatives in first quarter

by Fiona Gabriel | Saturday, Jun 23, 2012 | 461 views

In the first quarter, Morgan Stanley has shifted most of its derivatives positions to the bank units in the U.S , with the downgrade in credit ratings by Moody’s weighing on its business.

Moody’s, on Thursday, had downgraded the credit ratings of 15 major banks of the world and the unsecured debt rating for Morgan Stanley was cut by two notches , leaving it at the Baa1 rating which is the third lowest rating in investment grade.

A rating in the Baa tier can have significant impacts on the firm and can be even detrimental for its large capital market operations, with the counter parties not willing to trade with the firm and they will be needing an increased amount of money for backing trades, in collateral.

The bank, in its efforts to nullify the impact of the downgrades in ratings, has been moving the derivatives slowly to the high-rated banking unit. At the end of December 2011, the positions of notional derivatives at the unit was $1.72 trillion, while as of March it stands at $2.57 trillion , according to  the data from OCC. From the end of March 2011 , there has been a rise of $1.21 trillion in its portfolio.

The long term deposit rating on the banking unit has been cut by two notches and it now stands at A3. , which is one level above of its holding firm. The reviews on ratings were announced by Moody’s on February 15.

Morgan Stanley is the only firm among the top 5 US banks to hold most of the derivative portfolios at the holding company level. According to the OCC data, there has been a decline from $52.16 trillion to $50.34 trillion in the volumes of notional derivatives total for the firm.

As per the data of OCC, in terms of overall derivatives exposure, Morgan Stanley is the fourth largest among the five major US banks and is behind JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc and just ahead of Goldman Sachs Group Inc.

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