Regulatory Arbitrage: Morgan Stanley Seeking Permission To Launch Prop Trading In India

Tyler Durden's picture

While Wall Street's hordes of lawyers are doing their best to find the various loopholes in the Volcker Rule that will allow them to resume unconditional prop trading, they are being kept busy with all the various other forms of regulation that have been thrown at them by regulators and the government in an attempt to make it appear that it is not Wall Street but DC that calls the shots, as summarized below:

  • Volcker Rule
  • Derivative Reform
  • CFPB
  • QRM/QM
  • Durbin Amendment
  • Money market mutual funds
  • Orderly Liquidation Authority (OLA)
  • Liquidity Coverage Ratio (LCR)
  • Wholesale funding
  • SIFI requirements
  • Living wills

Some, however, such as Morgan Stanley have decided instead of engaging in costly fight with domestic regulation, to engage in cross border regulatory arbitrage, and focus on other, more prop-trading jurisdiction. Like India. As the Economic Times reports, the Indian brokerage arm of global investment banker Morgan Stanley has sought RBI's approval to start proprietary trading under which it will be able to buy and sell securities on its own account in India.

The application of Morgan Stanley is pending with the Reserve Bank as there is no clarity on whether foreign direct investment is permitted in proprietary trading, sources told PTI. RBI has sought views of the Finance Ministry on allowing the Indian arm of the US-based company to undertake proprietary trading.


Morgan Stanley was permitted by the Foreign Investment Promotion Board (FIPB) in 2007 to trade in securities, act as brokers, merchant bankers and undertake corporate advisory services.


The other activities permitted by the FIPB include primary dealership, underwriting, fixed income sales and portfolio management.


However, it was not clear from the permission granted whether Morgan Stanley could undertake proprietary trading, which envisages trading on own account. The FIPB permission was for broking, which is trading on behalf of clients.

For now, India itself is unclear whether it should rush and give Morgan Stanley the approval: after all, there is a chance the US may frown on this:

In the absence of a clarification from the FIPB, Morgan Stanley has approached RBI for specific permission to trade on proprietary account. RBI, however, has asked Morgan Stanley to seek advice from the Finance Ministry.


The ministry on its part has asked Morgan Stanley to discuss the matter again with the central bank.


As there is no clarity on FDI in proprietary trading, sources said, RBI has written to the Department of Economic Affairs in the Finance Ministry seeking its views on the matter.


In its application Morgan Stanley wants to know whether it could undertake proprietary trading, which is permitted to all Sebi registered stock brokers in India, whether or not owned by an offshore company. PTI JD CSMorgan Stanley keen to start proprietary trading in India

We expect this confusion will be promptly rectified, and Morgan Stanley first, and soon all other US-based banks will be greenlighted to conduct prop trading first in India, and soon everywhere else. The final open-question will be how MS and the other FDIC-insured hedge funds use offshore prop trading bases in order to trade US stocks from abroad for their own account. And as an added bonus, if banks can also get foreign taxpayer-backed guarantees for offshore operations if and when prop trades in global securities turn sour, that would be really great.

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philosophers bone's picture

Makes sense that the financial / brokerage industry (the only remaining meaningful industry in the US) moves offshore.  Good reason for the US to ditch all regulation so this arbitrage cannot occur.

Pladizow's picture

This is JPM's first step to corner and later manipulate the curry market!

VD's picture

OFFSHORING PROP TRADING = and you thought they would NOT try this¿¿¿ but the US taxpayer will ALWAYS bail them out from these here shores..

Harlequin001's picture

The only way we will survive this is to put gold back in money. That way these fuckers will have to pay real money to raise real cash from the market to place these bets, otherwise we will all die poor...

That is except for those of us who hold gold, though we too have to wait for these fuckers to buy gold with yet more printed money when they decide it's time for the price to rise.

There should be riots...


firstdivision's picture

I say let them move, and watch as they blow themselves up and we don't backstop it.  Also, good luck with your latency from there, oh and don't forget your bomb suit for your commute.  Mumbai isn't eaxactly a safe place for traders.

Steaming_Wookie_Doo's picture

"Mumbai isn't eaxactly a safe place for traders."

No kidding. Can you imagine how fast that building would be torn apart if (when) clients find they were cheated on their accts? I could've only hoped to have Jon Corzine teleported there.

OTOH, I would've picked Hong Kong or Singapore for prop trading long before anywhere in India (for any number of infrastructure or social reasons). Plus the bribes for India will be non-stop.

Ban KKiller's picture

Global corruption must not be contained. The "free" market will regulate itself. See Amerika. 



/sarc off...sort of. 

Al Huxley's picture

Wow, India's really making some rapid strides into the western banking world.  This is a great thing their government's doing, I think its been something like 60 years since the population's been REALLY fucked over hard by the west, guess they were missing the presence of an oppressive western ruling class.

Mercury's picture

Must be the climate.

AgShaman's picture

Followed shortly by offering Indian customers with storage/vaulting solutions for their precious metals

philosophers bone's picture

Yes, good thinking, so Indian PMs available for the inevitable bank bail-in

MsCreant's picture

Someone warn the Indians "The British are coming, the British are coming."

Good God that has to be right. 

What of China?

youngman's picture

It worked for AIG didnt it???  They went to the low regulation London market so they could play the numbers......and of course the USA bailed them out when they got into trouble....why not India....????  But not many of the clan over there...mostly Hindus I thought

MsCreant's picture

We will not see the end of this shit for a long while, they still have so much room, if they think globally, to pull in more suckerz to the Ponzi Scam. We collapse and others will inflate for a while until they too are milk(end) dry.

roadhazard's picture

You would think after watching what Goldman Sachs did to Greece no country would trust US firms with a ten foot poll.

beegle's picture

The Fed has been breeding 100 pound rottweilers , and now it expects they behave like labs , well good luck with that . If you like your bankster , you can keep your bankster .

El Hosel's picture

Bullish news, why isn't the "Market" up... Very confused, Fridays are Bullish too, ends in "Y" and all. Weird.

madbraz's picture

On a more relevant note, NY Fed just finished it's daily reverse repo transaction:  $95 billion in treasury collateral.  But..but...they said it was just an operation for "preparedness", "readiness", that it would be immaterial in size relative to reserves.  It was immaterial when it was $3 billion per day.


We are at quarter end and these amounts are exploding.  Coincidence or not, on September 30th these amounts exploded too.  Securities lending also misteriously exploded higher at the end of June (> $20 billion).  Year-end/Quarter-end window dressing with the aid of the NY Fed?  


Well, $95 billion is not immaterial.  It's more than 10% of total money market assets.  It's perhaps 3% of the tri-party repo industry, with leverage it's at least 10%.


68 bidders took the collateral, an average of $1.4 billion each.  When this reverse repo BS started in August, the limit per bidder was set at $500 million.  It has been expanded six-fold in 4 months.  


You are trying to tell me that each of these 68 bidders had "cash" of $1.4 billion at hand, or was a good chunk of that money market paper (European commercial paper at 100 cents on the dollar...)?


I'm in awe of the NY FED and it's intentions.  Who are they trying to protect here?  Why is it OK that these operations explode in value at quarter ends?  There are 18 banks under this program (plus federal agencies and most of the big MMFs), of which 11 are foreign.  


How does this benefit the American people?  Is this really inocuous monetary policy?





Tinky's picture

While this is outside my area of expertise, I really appreciate your updates on the matter. Please do keep hammering your point home!