Morgan Stanley Is Digesting Hires and Considering Derivatives Push

Morgan Stanley's hiring to beef up trading, emerging markets and foreign exchange desks is nearly over and the bank says the expansion is paying off in increased revenues and market share. Management also dropped hints an expansion in derivatives could be in the cards this year and next.

The hiring push began in mid-2009 and brought total headcount to 62,926 as of June 30, an increase of 1,374 compared with three months earlier. Morgan Stanley says it's now integrating new hires into its overall business while planning further but modest additional hires, primarily in developing markets like Asia. "We're going to continue to add selectively where it makes sense," said CFO Ruth Porat in a conference call Wednesday.

Derivatives Shift Under Consideration

Most intriguingly, Morgan Stanley is now mulling whether to move "certain derivatives into the bank and [using] the funding advantage that brings," Porat said, referring to the private bank unit Morgan Stanley is currently staffing up. The move would be a direct result of the financial reform law that President Obama signed Wednesday, which requires banks to spin off certain derivatives activities to separately capitalized affiliates. "We're going to take time to assess what makes the most sense for clients," she said. The possible moves could include FX and swaps.

Should Morgan Stanley's bank become its primary derivatives operation, that opens the question as to whether the firm would aim to become a larger player in derivatives by taking larger exposures and leveraging its bank's balance sheet. Officials didn't disclose any further details.

Fixed Income Trading Fell 36 Percent, Excluding Credit Impact

The bank's second-quarter trading results were widely described as relatively stable compared with rivals. But after backing out the impact of Morgan Stanley's own credit spread changes, its seemingly modest second-quarter revenue decline is more in line with the steep falls reported by Goldman Sachs and the other U.S. bulge-bracket banks. (Most other institutions stated trading revenue comparisons after subtracting credit spread effects.) On that basis, Morgan Stanley fixed income trading revenue shrank 36 percent in the second quarter, to $1.7 billion from $2.7 billion in the first quarter. Equity sales and trading revenue dropped 9 percent, to $1.3 billion.

Compensation and benefits as a percentage of net revenues was 34 percent in the quarter, down from 41 percent in the first (subtracting both a UK bonus tax and the additional revenues from DVA).