Morgan Stanley shifted derivatives in first quarter

NEW YORK (Reuters) - Morgan Stanley shifted more of its derivatives positions to its U.S. bank unit in the first quarter, as credit rating downgrades from Moody's Investors Service weighed on its business, data from the Office of the Comptroller of the Currency showed on Friday.

Moody's downgraded 15 of the world's largest banks on Thursday and cut Morgan Stanley's unsecured debt rating two notches to Baa1, the third lowest investment grade.

Ratings in the Baa tier can be detrimental for banks with large capital markets operations because they can reduce the number of counterparties willing to trade with the firm and also increase the amount of collateral banks need to back trades.

Morgan Stanley has been slowly moving derivatives into its higher-rated bank unit to reduce the impact of ratings downgrades, chief financial officer Ruth Porat said on an analyst call in April.

The bank increased its notional derivatives positions at its bank unit to $2.57 trillion at the end of March from $1.72 trillion at the end of December, OCC data show. The portfolio has increased from $1.21 trillion at the end of March 2011.

Moody's cut its long-term deposit rating on Morgan Stanley's bank unit by two notches on Thursday to A3, one level above the holding company. The rating agency announced the review on February 15.

Morgan Stanley is the only one of the largest five U.S. banks to hold most of its derivatives portfolio at the holding company level.

The bank's total derivatives notional volumes declined in the first quarter to $50.34 trillion from $52.16 trillion at the end of 2011, the OCC data show.

Morgan Stanley has the fourth largest overall derivatives exposures of the largest five U.S. banks, behind JPMorgan Chase & Co , Bank of America Corp and Citigroup Inc and before Goldman Sachs Group Inc , according to the OCC data.

(Additional reporting by David Henry; editing by Andre Grenon)