Morgan Stanley France SA, a foreign broker, has settled with market regulator SEBI over allegations that it allowed Reliance Strategic Investments (RSI) to engage in manipulative trading in the derivatives market in 2017.

What Happened? According to a SEBI enforcement order, Morgan Stanley paid a fine of ₹25.30 lakh without admitting or denying guilt under SEBI’s consent mechanism.

RSI is a company owned by the Reliance Industries Group, and SEBI’s show-cause notice reveals that RSI had entered into several long-dated Nifty index options trades with Morgan Stanley at a significant discount to the market price of the underlying index.

Although SEBI’s order does not mention the total value of the alleged manipulative trade, the regulator’s SCN showed that RSI had executed various combinations of long-dated deep in-the-money (ITM) options on Nifty with Morgan Stanley, which resulted in manipulation of the price of the contract.

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SEBI’s investigation notes: SEBI’s investigation reveals that RSI and Morgan Stanley knew at the time of entering into the trade for 11400 Nifty Put Options that the eventual trade of 11400 PE was not the correct price based on their research/understanding. However, the order notes that trades were executed at a discount of 15%, 35%, and 37% of the then implied volatility, based on a mutual arrangement to adjust all the costs of running various positions on just one strike.

The market regulator goes on to state that such practices are not desirable for the orderly functioning of the market. SEBI also mentions that the trading pattern of RSI and Morgan Stanley negotiating prices of various long-dated deep ITM index options resulted in the manipulation of the price of 11400 PE, which could mislead other traders/investors.

Morgan Stanley filed a settlement application with the market regulator in February 2022.

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