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

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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