Morgan Stanley (MS:US), which was downgraded two levels to Baa1 yesterday by Moody’s Investors Service, increased the percentage of the derivatives housed in its higher-rated bank subsidiary in the first quarter.
The notional amount of derivatives in Morgan Stanley Bank NA jumped 49 percent to $2.57 trillion, according to a report released today by the Office of the Comptroller of the Currency. That brought the share of Morgan Stanley’s total derivatives in the bank, which has a A3 rating after the cut, to 5.1 percent from 3.3 percent at the end of 2011.
Chief Financial Officer Ruth Porat said in April that the firm has been “slowly” moving derivatives into the bank, starting with new foreign-exchange contracts and following with interest-rate deals. The movement came as the firm faced questions about whether counterparties would halt long-dated business with Morgan Stanley after it was downgraded.
The bank is still waiting for approval from the Federal Reserve in order to transfer existing derivative contracts into the bank subsidiary, according to a person familiar with the matter, who asked not to be identified because the information isn’t public. Bank of America Corp. (BOFA:US), the second-largest U.S. lender, moved derivatives from its Merrill Lynch unit to its bank last year after its rating was cut, prompting objections from the Federal Deposit Insurance Corp., people familiar with the matter said at the time.
The increase in derivatives held in Morgan Stanley Bank was driven by a jump in over-the-counter forwards and options, which both climbed to more than 10 times the level at the end of last year, according to the OCC report.
Reuters reported the increase earlier today.
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