This letter is part of our ongoing effort to provide transparency to our clients on our business practices. The contents of this disclosure may be updated from time to time. As we enter into transactions with you based upon a mutual understanding of the terms and conditions of our dealing, it is important that you read this letter to understand how we may trade in relation to your expressions of interest or orders (as applicable) in respect of, foreign currency spot and foreign currency deliverable forwards products in your foreign exchange account and the Global Currency product (collectively, “FX Transaction Requests”), and otherwise engage with you and others in the foreign exchange (“FX”) markets generally. This includes our management of conflicts of interest that may exist or arise in our and/or our affiliates’ principal dealing and market making activities. To the extent that you continue to enter into FX transactions with us, it will be on the basis that you have read and understood these terms.
Morgan Stanley Smith Barney LLC (“Wealth Management”) is a global financial services and wealth management firm and may utilize the services of various institutional affiliates (collectively, “MS Affiliates” and collectively, MS Affiliates with Wealth Management, “Morgan Stanley”) in order to execute and fulfill clients’ FX Transaction Requests. Morgan Stanley is generally engaged in a broad spectrum of FX activities, (including with respect to equity and fixed income securities that are denominated in a foreign currency) for a variety of purposes. An FX order on behalf of any of your Wealth Management accounts will generally be executed by Wealth Management as principal in a back-to-back trade with one or more of its various MS Affiliates (including, but not limited to Morgan Stanley Capital Services and Morgan Stanley International PLC).
Principal Trading and Market-Making
The FX markets are predominantly principal markets. Thus, Morgan Stanley will typically face its clients as principal when executing trades resulting from FX Transaction Requests and does not generally act as an agent, broker or fiduciary with respect to market making activity. Accordingly, Morgan Stanley may trade ahead of, alongside or following your transactions in order, for example, to execute other client transactions (including where such trading is on a systematic, automated basis through the use of algorithms or other execution methodologies); to hedge or source liquidity for market making purposes (either for your transaction or in connection with other client activity); to liquidate risk resulting from our client facilitation business; as part of a previously commenced strategy; or to facilitate the purchase and/or settlement of securities issued in debt offerings (including where we act as billing and delivery agent). These activities and unrelated Morgan Stanley activity on a principal basis may impact whether we execute an FX Transaction Request with you or the prices (including reference prices) of your transactions and/or the time at which your transactions are executed; and may also trigger or delay, or prevent the trigger of, stop loss orders, or any other events which are dependent on market movements. We employ reasonably designed means to minimize market impact and stand ready to discuss market pricing and execution levels with you at your request. When we act with discretion in executing an order (for example, at “best,” or through an order worked over a period of time and subject to parameters we agree to with you), we are not, unless specifically agreed to with you, acting as your agent and such order is on a “not held” basis. Morgan Stanley may enter into transactions in the relevant or related instruments through internal sources of liquidity or in the market at different times and prices in order to execute your FX Transaction Request and offset the risk incurred, and ultimately provide you with an overall fill that takes into account these transactions. Unless we agree otherwise, the price of any transaction we execute with you may include what we believe to be a reasonable spread, as further described below under “Liquidity Sourcing” and “Pricing.”
We may choose to leave our principal position unhedged or partially hedged, and may adjust any hedge from time to time in our sole discretion. In order to unwind a hedge, we may need to unwind our principal position by trading in the relevant or related instruments. Regardless of whether or how we choose to hedge, any profit or loss resulting from any hedging activity will accrue solely to Morgan Stanley.
When negotiating any particular FX Transaction Requests with us, you may ask that we not trade as a principal ahead of, or alongside, your transaction, or that we execute in a certain manner, such as through the use of algorithms. Please note that such a request may limit the execution services we are able to offer you in any particular case.
Morgan Stanley utilizes a number of internally developed tools designed to access both external and internal sources of liquidity in order for Morgan Stanley, as principal, to provide what we deem to be the most favorable bids and offers, and executions, reasonably available under the circumstances. These tools may include algorithms, internalization engines and/or smart order routers that route full or partial FX Transaction Requests to various external liquidity sources, including certain trading venues that electronically provide information to us regarding their available and accessible liquidity. Morgan Stanley may benefit from reduced transaction costs when executing through certain internal or external trading venues and, if we have an investment in, or other relationship with, an external venue, the Firm may receive other benefits as a result of that interest. In addition, all or a portion of your transaction may be filled by internal sources of liquidity rather than external trading venues. Either way, unless we agree otherwise, Morgan Stanley will trade in a principal capacity, and your execution levels may be inclusive of what we deem to be a reasonable spread above the price at which Morgan Stanley may transact, or has transacted, with other clients or trading counterparties, in addition to any disclosed fees that may be charged to access particular sources of liquidity.
The price at which you trade with Wealth Management will depend on a number of factors, including those set out below. This list is not exhaustive and Wealth Management may take into account other factors that it considers appropriate in determining that price.
A. When we execute FX Transaction Requests for you, a component of the price is compensation which may include a markup or markdown (trading spread) by our MS Affiliates in addition to the FX commission charged by your Financial Advisor (“FA”). In addition, to the extent we execute a trade with you through internal sources of liquidity, and that liquidity is sourced from another client, we may also receive additional compensation on, and fees for, the trade we execute with that other client which will be included in the spread charged to that client.
B. The type of product, transaction and market in which the product would be traded, such as:
(i) the manner in which your FA enters your order (e.g., electronic or voice trading platform);
(ii) the trading venue through which Morgan Stanley uses (e.g., single dealer or third party electronic or voice trading platform);
(iii) the type of FX Transaction Request (e.g., expression of interest or order, and terms of such request, including “stop loss,” “at best” or “limit”);
(iv) the size, type and direction of the transaction;
(v) market conditions, including market events, volatility and time of execution;
(vi) transparency of the market, including visible liquidity, trading volume and available external venues or platforms;
(vii) the amount of mark-up applied;
(viii) the accessibility of third party quotations and other pricing information.
C. Internal costs to Morgan Stanley, such as counterparty credit risk, hedging and market
risk, funding, capital and overhead;
D. Client-specific factors, such as: the volume, types of trades and frequency/velocity of trading the client executes both with Morgan Stanley and in the market; credit quality; and potential market impact.
E. Applicable regulatory requirements.
Order Management and Fulfillment
FX Transaction Requests may be submitted by your FA electronically or by voice or other traditional communication channels, and there is no guarantee that any FX Transaction Request will be filled, in whole or in part. Orders submitted electronically are time stamped upon receipt by Wealth Management and voice orders that are not subject to immediate execution are time stamped when input into the order management system.
In the case of either orders or expressions of interest, Morgan Stanley may utilize algorithms, smart order routers and technology which take into account a variety of factors (including, but not limited to, the applicable currency pair, the time zone/region in which an order is submitted, current market conditions, liquidity, order size, historically observed fill rates and other proprietary factors we determine to be relevant) and are designed to access external and/or internal sources of liquidity, in order to provide what we deem to be the fairest bids, offers and executions reasonably available under the circumstances.
Spot foreign exchange orders that are submitted through your FA, which may include algorithmic order types such as volume-weighted-average-price and time-weighted-average-price orders, may be filled by Morgan Stanley accessing (1) external FX market centers (including but not limited to, trading platforms, inter-dealer brokers and 3rd party matching venues), (2) our internal market making desk as a liquidity provider, or (3) our internal Morgan Stanley matching engines.
When we source liquidity internally as the operator of a matching mechanism, we only do so when the price of a trade will achieve executions at prices which we believe are comparable to those visible to us on external FX market centers. These executions are subject to our pre-agreed fee.
Our receipt of a FX Transaction Request and any indication we provide to you that we are “working” on trade execution with you, is our indication that we are willing (but not obligated) to enter into all or a portion of a trade at the price requested by you, and we do not assume any market risk or legal obligation with respect to such FX Transaction Request until we have agreed to execute a trade with you. At and around the same time that we receive your FX Transaction Request, we may also be executing transactions in similar or related products as a result of our market making activities for other clients and to hedge our risk with respect to these products. In light of this, it is at our discretion as to how we may satisfy your FX Transaction Request and our other market making activities, including as to timing, prioritization, aggregation and manner of execution, as well as the amount and price of your fill. In all cases, our handling of these requests will be dependent on our ability to access liquidity (such as in the case of “market” or “at best” orders) or liquidity at the relevant or better price (such as in the case of “stop loss” or “limit” orders). In addition, your transaction will likely include what we believe is a reasonable spread, as described above. For “stop loss,” orders there is a risk, particularly in times of market volatility or stress, that your FX Transaction Request may be triggered in a manner or at a time that you do not expect, or at a level that may be worse than you requested. Morgan Stanley reserves the right to retain all or part of any price improvements in the market, in light of the greater risk we take in executing both “stop loss” and “limit” FX Transaction Requests and this may also impact the amount of your fill. For requests at “market,” any upside or downside fluctuations in the price at the time of execution may be passed on to you.
Your FX Transaction Requests may also be subject to priorities and/or aggregation we determine in our discretion that may result in either Morgan Stanley’s own trades or other client trades being executed ahead of, or alongside, any trades we execute with you, which may impact the price of your transactions, the timing of execution and/or the amount of your fill. There may also be inherent latencies at both internal and external venues that result in delays between the time we receive your requests and the time we execute trades resulting from such requests. These latencies and our risk management practices may impact whether we execute transactions relating to all or a portion of your FX Transaction Requests and the price at which transactions are executed. For example, we may determine whether there have been any intervening price moves, market disruptions or other unusual market conditions. If we determine to execute, the costs or benefits of any price changes arising from these risk management practices may, in our discretion, be retained by us or passed on to you.
Foreign exchange benchmark orders for the WM Reuters (“WMR”) fix may be submitted by voice or electronically and are executed at the benchmark price plus either (a) the published WMR bid/offer or (b) an agreed fee which in either case is embedded in the all-in rate that is communicated to you after the relevant fixing is published.
When negotiating any particular transaction with us, you may ask that we access or avoid specific sources of liquidity in the relevant market. Please note that our ability to facilitate such a request will vary, and may limit the execution services we are ultimately able to offer you in any particular case.
Protecting the confidentiality and security of client information is an important part of how we conduct our business. Morgan Stanley also has policies and procedures to assist in the identification, prevention and management of conflicts of interest between Morgan Stanley and you, or between you and another Morgan Stanley client, that may arise in the course of your interactions with us. In consideration of these conflict management policies and procedures, we may in certain circumstances disclose to you additional specific information regarding the source and nature of a particular conflict as well as the steps taken by us to mitigate such conflict.
You should understand that Morgan Stanley makes use of economic information contained in FX Transaction Requests and executed transactions in order to effectuate and risk manage the transactions themselves, as well as for portfolio and inventory risk management purposes. Specifically, and unless you instruct otherwise, Morgan Stanley may use the economic terms of a FX Transaction Request (but not the client identity) to test liquidity and/or execute trades with one or more third parties (including interdealer brokers) in order to source liquidity. We may also use the economic terms of various transactions (including market, liquidity and credit risks) on an individual, portfolio, or other basis to evaluate and execute risk-mitigating transactions. In addition, as part of its obligations as a regulated entity, Morgan Stanley also shares client information as requested or required by its global regulators.
With regard to executed FX transactions, Morgan Stanley analyzes this information on an individual and aggregate basis for a variety of purposes, including counterparty, portfolio and inventory risk management, sales coverage, and client relationship management. In addition, Morgan Stanley may analyze, comment on and disseminate anonymized and aggregated information regarding executed FX transactions, as well as FX Transaction Requests that may be away from the current market, together with other available information regarding various markets, internally and to its clients as part of its general market commentary and trade ideas.
Morgan Stanley is dedicated to upholding a high level of integrity and adhering to published industry best practices (such as those published by the Global Foreign Exchange Committee and other similar industry bodies) in our dealings with clients.
This letter is meant to underscore Morgan Stanley’s commitment to providing clients transparency on our FX business practices. If you have questions after reading this letter or our dealings with you, we encourage you to contact a member of the Morgan Stanley team servicing your FX account. We also encourage you to review important regulatory and other disclosures in any agreements that pertain to your FX account at Morgan Stanley.