Swap Trades, Australian Mortgages, Google Probes: Compliance
March 25, 2011, 8:28 AM EDTBy Carla Main
(Adds EU corporate governance and Shanghai Futures Exchange in Compliance Policy section and Brussels summit and FSA swap probe in Compliance Action.)
March 25 (Bloomberg) -- CBOE Holdings Inc. and NYSE Euronext may create venues for derivatives that now trade over the counter to capitalize on proposed rules designed to bring more transparency to the $583 trillion market.
The exchange operators may form swap-trading platforms for privately negotiated derivatives that the government plans to move onto regulated trading systems or exchanges that will provide public data about prices and transactions, according to interviews with company executives during the past week. Most of the contracts are now traded between broker-dealers over the phone or through private electronic systems.
Congress last year ordered that most standardized OTC derivatives in the U.S. be guaranteed by clearinghouses and traded on exchanges or swap-execution facilities, also known as SEFs, after a 100-fold surge in trading of credit-default contracts over seven years made oversight of the financial system more difficult. Regulators are now writing rules for the swap platforms and the products that will be traded on them.
Derivatives sent to clearinghouses must trade on SEFs or exchanges, according to the Dodd-Frank Act approved last year. The global market for such transactions was $583 trillion as of June, according to the Basel-based Bank for International Settlements.
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Compliance Policy
Australia Introduces Legislation to Stop Mortgage Signaling
Australia introduced legislation to stop banks from signaling future mortgage rate increases to each other as Treasurer Wayne Swan intensifies efforts to rein in the nation’s four biggest banks.
The Australian Competition & Consumer Commission has found “strong evidence” that banks have been engaging in such behavior and that price flagging is designed to undermine competition, Swan said in a statement yesterday.
Swan’s proposal follows public anger after Commonwealth Bank of Australia, Westpac Banking Corp., National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. raised interest rates by more than the central bank in November. Together, they control more than 80 percent of the home-loan market.
Australia’s banks have rejected claims of price signaling as “unfounded” and have urged the government against the move.
Lenders objected to the price-signaling laws because they “will make it more difficult for banks to explain to customers what may happen with the direction of interest rates on mortgages and savings,” the Australian Bankers Association said Dec. 12, when the ban was proposed by Swan.
KKR Received Request From SEC in Sovereign Wealth Fund Probe
KKR & Co., the private-equity firm founded by Henry R. Kravis and George R. Roberts, said it received a request from U.S. regulators for information about the company’s dealings with sovereign wealth funds.
KKR received the Securities and Exchange Commission request in January and is cooperating with the agency’s investigation, the New York-based firm said in a March 7 regulatory filing. The SEC sought information regarding “investors and clients that are sovereign wealth funds and certain services provided by KKR,” according to the filing.
The SEC launched a probe this year to determine whether financial firms made improper payments to placement agents to secure investments from sovereign wealth funds, investment pools drawn from a country’s reserves, according to people with knowledge of the probe.
An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the U.S. Foreign Corrupt Practices Act.
Drugmakers May Foot Bill for More Frequent Factory Inspections
Brand-name drugmakers may start paying fees of as much as $30,000 for plant inspections by U.S. regulators under a funding plan from manufacturers of generic medicines.
The Generic Pharmaceutical Association proposed that its members and brand-name makers share the cost of beefing up surveillance of domestic and international plants, said Heather Bresch, president of Mylan Inc., the biggest U.S. maker of generics. The plan was offered in talks with the Food and Drug Administration in late February, she said.
FDA inspections are currently funded by taxpayers. New fees to increase the frequency would come on top of the $856 million brand-name producers pay a year for FDA product reviews.
Sandy Walsh, an FDA spokeswoman, said it was too early for the agency to comment on specific proposals.
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EU May Propose Fixes in April to Shield CO2 Market From Fraud
The European Union may propose regulatory changes as soon as next month to boost security in its emissions-trading system and restore investors’ trust after a string of thefts and fraud.
The European Commission, supervisor of the carbon cap-and- trade program that includes more than 11,000 utilities and manufacturers, is working to modify the rules for registries that track emission permits, said Yvon Slingenberg, head of the emissions-trading unit. The EU is tightening security after criminals illegally transferred allowances valued at about 60 million euros ($85 million) from registries in at least five countries during the past year.
The EU will discuss a 48-hour delay to provide extra time for the transfer of permits between user accounts in registries, a person with knowledge of the matter said last month. Slingenberg said the commission is still assessing the final shape of the mechanism.
EU to Seek Views on Ways to Bolster Corporate Governance
The European Commission said it will seek views on possible measures to bolster corporate governance at companies in the region.
The commission said it will publish a consultation paper on April 5 on possible changes to governance principles in the 27- nation EU. The deadline for responses will be July 22 and follow-up measures will be adopted in 2012, it said.
“One of the lessons of the crisis is that corporate governance, until now usually based on self-regulation, was not as effective as it could have been,” the Brussels-based commission said on its website today. A “higher convergence of corporate governance rules across the EU could facilitate companies’ activities cross-border and reduce compliance costs.”
CSRC’s Shang Calls for More Futures Monitoring, Securities Says
China Securities Regulatory Commission Chairman Shang Fulin called on the Shanghai Futures Exchange to strengthen monitoring of trading, the Securities Times reported today.
The exchange should ensure that effective measures are in place to prevent market manipulation and other violations, the newspaper reported, citing remarks Shang made yesterday at a ceremony marking the start of lead futures trading in Shanghai.
Compliance Action
European Leaders Meet in Brussels on Rescue, Cut Startup Capital
European Union leaders cut the startup capital for the future euro emergency aid mechanism after German demands to make smaller upfront payments stoked fresh concerns about Europe’s effort to quell the debt crisis.
As speculation swirled that Portugal will be the next victim of the crisis, the leaders bowed to German Chancellor Angela Merkel’s call to pare the fund’s paid-in capital as of 2013 to 16 billion euros ($23 billion), less than the 40 billion euros foreseen in a March 21 accord.
“It was a difficult debate with Germany,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after the first session of an EU summit in Brussels early today. “Germany found that in the compromise agreed last Monday it would have to pay in too much. So we had to tackle that issue.”
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Bloomberg’s David Tweed reports from Brussels, where European leaders are meeting to sign off on measures aimed at drawing a line under the region’s sovereign debt crisis.
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Google Said to Face Possible Ohio, Wisconsin Antitrust Probes
Google Inc., operator of the world’s biggest search engine, faces possible antitrust probes by Ohio and Wisconsin over its business practices, according to a state official and a person familiar with the matters.
Ohio Attorney General Mike DeWine is “evaluating the facts to determine if it’s something we want to review,” Dan Tierney, his spokesman, said. In Wisconsin, Attorney General J.B. Van Hollen is weighing a probe of Google’s bid to buy ITA Software Inc., according to a person familiar with the matter who declined to be identified because the process isn’t public. The U.S. Justice Department is already reviewing the deal.
Officials in Texas, the first state to open its own probe of Microsoft Corp. in 1997, are also questioning Google.
Adam Kovacevich, a Google spokesman, said the company is answering inquiries from the Texas attorney general and the European Commission, which is investigating whether Google skews search results to benefit its own services. He declined to comment on possible action by the states.
Neither the Justice Department nor the Federal Trade Commission is pursuing a broad antitrust inquiry of Google, according to people familiar with the agencies. Gina Talamona, a Justice Department spokeswoman, and FTC spokeswoman Cecelia Prewett declined to comment on possible investigations of Google.
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FSA Said to Review Credit-Default Swaps in Market Abuse Probe
The U.K. Financial Services Authority started a market- abuse probe into trading of credit-default swaps on corporate debt, according to four people familiar with the investigation.
The regulator requested information from market participants to determine whether there’s been insider trading involving the financial products, said the people, who declined to be identified because the investigation isn’t public. Last month, U.S. prosecutors said they would step up probes of possible fraud involving credit default swaps and collateralized debt obligations.
The FSA is cracking down on insider trading and has charged 17 defendants in four cases that will go to trial over the next two years, according to its business plan. Regulators targeted swaps trades and short selling during the financial crisis as companies, banks and governments complained that speculation undermined the price of securities.
Chris Hamilton, an FSA spokesman, declined to comment. Last month, a former Dresdner Kleinwort banker, whose deals were the common thread to a more than yearlong insider-trading probe, was sentenced to 40 months in jail, the longest prison term for the crime in the U.K.
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Courts
U.K. Antitrust Regulator’s Cartel Fines Reduced on Appeal
Britain’s antitrust regulator miscalculated fines against Galliford Try Plc and five other construction companies in a bid-rigging cartel, a U.K. appeals court said in a ruling cutting their total fines by 76 percent.
The Office of Fair Trading erroneously set the fines using the companies’ revenue from the year before they were issued instead of the year prior to the cartel’s end, the Competition Appeal Tribunal ruled yesterday in London. The penalties were cut to 3.78 million pounds ($6.1 million) from 15.5 million pounds.
The tribunal also “accepted that the high turnover and low margin nature of the construction industry was relevant to the calculation of the penalties,” according to the judgment. The result was “disproportionate and excessive fines,” it said.
The OFT earlier said it will consider appealing the ruling to the Court of Appeal.
U.S. Investigating Jefferson County Sewer Deals in Bank Probe
The U.S. Justice Department is investigating sewer financing by Jefferson County, Alabama, as part of a nationwide probe of a conspiracy by Wall Street banks to rig bids and fix prices on derivatives sold to municipalities, according to court papers.
The disclosure came in a March 21 filing in Birmingham federal court by Douglas MacFaddin, JPMorgan Chase & Co.’s former head of municipal derivatives, in a U.S. Securities and Exchange Commission lawsuit.
MacFaddin, who is a target of the Justice Department antitrust investigation, according to his broker registration records, was seeking to block a Justice Department request to delay depositions in the SEC case against him. The judge granted the government a two-month delay.
Federal officials revealed the county’s involvement in the investigation to MacFaddin, his lawyers wrote in court papers in the SEC suit.
Alisa Finelli, a Justice Department spokeswoman, declined to comment. David Carrington, the president of the Jefferson County commission, didn’t immediately return a message seeking comment.
The case is Securities and Exchange Commission v. Charles E. LeCroy and Douglas W. MacFaddin, 09-CV-02238, U.S. District Court, Northern District of Alabama (Birmingham).
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Interviews/Speeches
WPP’s Sorrell to Recommend Relocation of Tax Base to U.K.
WPP Plc Chief Executive Officer Martin Sorrell said in an e-mail yesterday that he will recommend the world’s largest advertising company return its tax base to the U.K. from Ireland, following proposed cuts in Britain’s corporate tax.
WPP, the owner of ad agencies including Young & Rubicam Inc., Ogilvy & Mather and the Grey Group, left the U.K. for Ireland in 2008, citing the burden of taxation on foreign earnings. Media company United Business Media Ltd. and drugmaker Shire Plc also moved their tax bases to Ireland, while another media company, Informa Plc, moved to Switzerland.
Unveiling Britain’s 2011 budget March 23, Chancellor George Osborne indicated he would speed up a cut in corporate tax and move forward with plans to amend tax on overseas profit of U.K. companies. Osborne told BBC Radio 4 yesterday that WPP was planning to move back to the U.K.
He pledged to change “complex rules” for controlled foreign companies and introduce a 5.75 percent rate on overseas financing income to make the U.K. competitive and attractive to multinational companies.
--With assistance from Anna Edney, Sara Forden and Catherine Larkin in Washington; Brian Womack in San Francisco; Angus Whitley and Jacob Greber in Sydney; Kristen Schweizer in London; Rainer Buergin in Berlin; Ewa Krukowska in Budapest; Martin Z. Braun and Nina Mehta in New York; James G. Neuger, Jim Brunsden and Stephanie Bodoni in Brussels; and Erik Larson and Ben Moshinsky in London. Editor: Stephen Farr
To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.
To contact the editor responsible for this report: David E. Rovella at drovella@bloomberg.net.
