Morgan Stanley has agreed to pay a penalty in the US to settle charges that it used trades involving 'customer cash' to lower its own borrowing costs, in breach of the Securities and Exchange Commission’s Customer Protection Rule.

The rule is designed to safeguard customers’ cash and securities so that they can be returned promptly in the event of a broker-dealer's failure. The SEC order states that between March 2013 to May 2015, Morgan Stanley’s US broker-dealer used transactions with an affiliate to reduce the amount it was required to deposit in its customer reserve account.

The regulator has said that complex trading schemes designed to reduce the amount a broker-dealer must maintain in its customer reserve account artificially run contrary to the rule.

According to the SEC’s order, Morgan Stanley ordered its affiliate, Morgan Stanley Equity Financing Ltd, to serve as a customer of its US broker-dealer, a relationship that allowed the affiliate to use margin loans from that broker-dealer to finance the costs of hedging swap trades with customers. The margin loans lowered the borrowing costs incurred to hedge these swap trades and reduced US broker-dealer’s customer reserve account deposit requirements by tens to hundreds of millions of dollars per day.

The SEC says that Morgan Stanley submitted inaccurate reports to it as a result of an inaccurate calculatiion of its customer reserve account requirements. Morgan Stanley co-operated 'substantially' during the SEC’s investigation and has agreed to review its compliance with the Customer Protection Rule and to take remedial steps to improve its calculation processes. It has also beefed up the quantity of excess funds that it maintains in its customer reserve account.

As so often happens, the firm has not admitted or denied anything. It has, however, promised to cease and desist from committing or causing any similar infractions in future.