) announced its plans of making an equity investment in Eris
Exchange - a U.S. futures exchange that offers Interest Rate Swap
Futures. Morgan Stanley is the latest addition to the list of
financial institutions making increased investments in
derivatives ahead of an expected surge in standardized
The financial details of the transaction were not disclosed;
however, it is expected that Morgan Stanley will acquire a
minority stake in Eris early next year. The company will also
join the board of directors of latter as part of the deal.
Under the provisions of the Dodd-Frank Law, nearly $639 trillion
worth of over-the-counter derivatives will be moved to exchanges
and routed through central clearinghouses. This will make swap
trading more regulated like futures trading, thereby mitigating
the risks associated with over-the-counter swap trading largely.
The reforms are likely to generate massive interest in futures as
well as the newly-formed hybridized derivative instruments -
better referred as swap futures. According to a survey by Morgan
Stanley, a large section of investors is more than willing to
increase their trading in so-called swap futures.
Consequently, big financial institutions that are eager to move
away from traditional OTC derivatives trading have found very
good opportunity in the swap futures. This has resulted in
heightened competition in the swap futures trading space.
Close on the heels of Morgan Stanley's announcement of stake
Intercontinental Exchange Inc
) agreed to acquire NYSE Euronext for cash and stock worth $8.2
billion. The merger underscores the growing importance of
derivatives trading going forward. Moreover, Chicago-based
CME Group Inc.
) introduced an interest-rate swap futures contract, which is
traded on the exchange, but delivers an off-exchange derivative
We believe that the stake buyout in Eris Exchange would prove
lucrative to Morgan Stanley in the future. With the conventional
OTC derivatives trading set for a major overhaul, amidst the
stringent regulatory landscape, swap futures will provide
investors other profitable investment avenues.
Currently, Morgan Stanley retains its Zacks #3 Rank, which
translates into a short-term Hold rating. Considering the
fundamentals, we also maintain a long term 'Neutral'
recommendation on the shares.
CME GROUP INC (CME): Free Stock Analysis
INTERCONTINENTL (ICE): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
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