Bloomberg News

Accounting Standards, ‘Rogue’ S-Chips, Spain: Compliance

July 08, 2011

(Updates with EU stress tests in Compliance Policy, MasterCard in Courts and Varney in Comings and Goings.)

July 8 (Bloomberg) -- Major financial firms and credit ratings companies are pushing the U.S. Securities and Exchange Commission to blend U.S. and international accounting standards into one set of practices.

At a roundtable meeting on accounting standards in Washington yesterday, SEC Chairman Mary Schapiro called the idea “a major decision for this agency, and not one to be taken lightly.”

Representatives of Morgan Stanley, Allstate Corp., Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit who took part in the roundtable argued that differing accounting standards pose difficulties for international businesses.

Gregory Jonas, a Morgan Stanley managing director who advocated a gradual U.S. transition toward International Financial Reporting Standards, pointed out that diverse languages would prove “troublesome.”

The SEC, which oversees U.S. accounting regulation, has agreed to develop a plan to converge U.S. and international standards. The agency published a proposal in May for a step-by- step blending of the international provisions with U.S. standards. In that report, the SEC said it “has yet to make a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers.”

Compliance Policy

Most Interest-Rate Derivatives Can Be Cleared, LCH Says

About 84 percent of interest-rate derivatives, the largest part of the $601 trillion private marketplace, will be able to be processed by clearinghouses by year-end, according to LCH.Clearnet Ltd.

The assessment is more optimistic than a May report by the Office of the Comptroller of the Currency that assumed 20 percent of OTC derivatives in the U.S. can be cleared. London- based LCH.Clearnet, owner of the largest swaps clearinghouse, already handles 52 percent of the interest-rate swap market, according to a company analysis, and plans to accept forward- rate agreements by year-end.

American and European regulators are writing rules to require most swaps to be traded on exchanges or similar systems and cleared after the contracts contributed to the financial crisis. Clearinghouses, capitalized by their members, lessen the effects of a default, require margin to back trades and allow regulators to monitor positions and market prices.

The amount of the market that ends up in a clearinghouse is important because it will determine how expensive trading OTC derivatives will be, said Craig Pirrong, a finance professor at the University of Houston.

About 68 percent of the interest-rate derivatives market can be cleared now, according to the LCH.Clearnet analysis. Other trades, consisting of exotic swaps that have customized features, will never be eligible for clearing, according to LCH.Clearnet.

For more, click here.

Consumer Bureau Plans to Write Rules for Mortgage Servicers

The Consumer Financial Protection Bureau is preparing to impose rules on U.S. mortgage servicing firms, which will be a priority for the agency, said Raj Date, the bureau’s associate director.

He made the remarks in testimony prepared for delivery to members of the House Financial Services Committee yesterday.

The $10.4 trillion industry has structural features “that make it especially prone to the risk of consumer harm,” one of which is lack of consumer choice because homeowners can’t choose their mortgage servicer, Date said.

Members of the financial services and oversight subcommittees of the House panel are examining lapses and gaps in mortgage servicing regulation.

The Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Reserve and Federal Deposit Insurance Corp. reached an accord with the 14 largest servicers in April, requiring them to improve foreclosure, loan- modification and refinancing procedures. The settlement covers firms that handle nearly 70 percent of all mortgages.

Date said the bureau is working with other agencies, including the Federal Housing Finance Agency, which oversees mortgage companies Fannie Mae and Freddie Mac, to establish industry standards.

EU Banks Face Possible September Deadline, Profit Estimates

Banks that fail this year’s round of European Union stress tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document.

Firms may be given a further three months to implement these plans and raise the additional capital they need, according to the preliminary document obtained by Bloomberg News. Most European bank shares fell.

Lenders should “provide a credible plan indicating how they intend to address the weaknesses revealed by the stress test,” according the document dated July 7 that was prepared by government officials from the 27-nation region. Firms should use retained earnings, stock offerings and asset sales to make up the short fall, the note says.

Ninety-one banks will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, according to the European Banking Authority, which is coordinating the exercise.

For more, click here.

Separately, EU regulators may publish estimates of the future profitability of the region’s lenders as part of the bank stress-test results, four people familiar with the process said.

Banks are challenging the proposal from the European Banking Authority because the estimates may be lower than figures published by some lenders, said the people, who didn’t want to be identified because the discussions are private. Firms are concerned the disclosure could trigger a decline in their stock prices, according to one of the people.

European regulators are seeking to assuage investor concern that banks in the region are inadequately capitalized with a second round of stress tests. The EBA is weighing whether to make banks publish a forecast for 2011 or 2012, one of the people said. Companies are pushing for the latter because they expect a longer-term forecast would have less of an impact on their stock price, the person said. Officials at the EBA declined to comment on the negotiations.

For more, click here.

Compliance Action

JPMorgan to Pay $228 Million to End Municipal Bid-Rig Case

JPMorgan Chase & Co. agreed to pay $228 million to settle federal charges that the bank conspired to rig the bidding on investment contracts sold to state and local governments to boost its profits at taxpayer expense.

JPMorgan, the second-biggest U.S. bank, agreed to pay $177 million to settle federal and state charges and to return $51.2 million to municipal borrowers affected by the conduct, the Securities and Exchange Commission said yesterday in a statement.

The U.S. Justice Department and the SEC for more than four years have been investigating how banks and financial advisers fixed the bidding on investments sold to municipalities. Prosecutors say the conspiracy cost taxpayers by allowing banks to pay governments below-market rates. JPMorgan’s penalties are the largest yet to result from the investigation, which also led to settlements with UBS AG and Bank of America Corp.

The Justice Department said the investigation is continuing.

The settlement marks the second that JPMorgan has reached arising from its municipal derivatives business. In November 2009, the bank agreed to a $722 million accord with the SEC to end an investigation over its sales of derivatives to Jefferson County, Alabama.

For more, click here.

For a Bloomberg Television report, click here.

Chinese ‘Rogue Executives’ Dodge Singapore Law by Staying Home

Singapore investors are demanding tougher rules to prosecute executives of China-based companies traded in the city-state after scandals from New York to Hong Kong have wiped out the market value of such firms.

U.S. and Hong Kong regulators have been ramping up Chinese company probes as Muddy Waters LLC said last month that Sino- Forest Corp. overstated its timber holdings, erasing as much as 82 percent of the China-based tree plantation owner’s market capitalization in Toronto.

With more than one in 10 Chinese firms listed in Singapore delisted or suspended since 2008, regulators must seek a balance between the need for investor protection and a desire to attract companies to Singapore’s exchange. Lawyers said executives of Chinese firms that trade in Singapore, so-called S-chips, are beyond the reach of current law as long as they remain in China.

The Securities Investors Association (Singapore) has been seeking safeguards from the island’s exchange for at least a year, including ensuring funds are accounted for after leaving the city, said association president David Gerald.

At least 20 Chinese firms on the exchange, where one in five stocks are China-based, have been suspended or ordered to delist since 2008. There were 152 China-based firms listed on Singapore’s S$893 billion ($727 billion) stock market at the end of June, according to the exchange. The FTSE Strait Times China Index of 63 Chinese stocks has lost 11 percent this year, compared with a 2 percent slide in the Straits Times Index.

For more, click here.

Spain Fends Off Criticism on Banks as EU Introduces Reviews

Spain blunted European Union criticism of its handling of savings banks and tax policy, persuading the EU to water down judgments issued as part of a new economic-policing system.

The non-binding recommendations, to be issued by EU finance ministers on July 12 in Brussels, urge Spain to “monitor closely” the reorganization of savings banks, softening an earlier plea to “reinforce” the restructuring, documents obtained by Bloomberg News show.

Spain’s case, and concessions to Belgium, France, Malta and Cyprus, show the obstacles faced by central EU authorities in putting their stamp on national economic policies, even as they struggle to contain the sovereign-debt crisis.

The first draft of the recommendations was issued by the European Commission, the bloc’s central regulator, on June 7 and endorsed in principle by government leaders at a June 24 summit.

The detailed recommendations, capping the bloc’s first-ever “European Semester” of policy coordination, weren’t completed by government representatives until yesterday and are set to be rubber-stamped next week.

Commission spokesman Amadeu Altafaj didn’t immediately reply to a voicemail seeking comment. A Spanish Finance Ministry spokesman who declined to be named said Spain had made its arguments to the commission.

For more, click here.

Courts/Arbitration Panels

Fisher’s Firm Told to Pay $376,000 Over Retiree Losses

Fisher Investments Inc., the firm run by Forbes magazine columnist Kenneth Fisher, may have to pay damages of $376,075 for breaching its fiduciary duty to a retired investor.

Sharyn Silverstein, 64, is entitled to out-of-pocket losses she incurred as a result of Fisher Investments liquidating her bond portfolio and investing 100 percent of the proceeds in stocks, according to a copy of the interim arbitration award issued JAMS, obtained by Bloomberg News.

JAMS, based in Irvine, California, is a private forum for arbitration and mediation.

Silverstein had invested with Fisher in 2007 after multiple calls and visits from a Fisher outside salesman, according to the award document. She had initially contacted the firm after seeing a Fisher advertisement for a complimentary book in USA Today, the document said.

“The decision was completely wrong on the law and the facts. With more than 25,000 clients, losing an arbitration once every seven years is a record far better than any major competitor, which underscores the integrity of our firm,” said David Eckerly, group vice president corporate communications for Woodside, California-based Fisher Investments. Kenneth Fisher is the firm’s founder and chief executive officer.

Fisher Investments manages more than $41 billion for almost 40,000 accounts, primarily for individual investors, according to its most recent regulatory filings available on the U.S. Securities and Exchange Commission website.

Joseph Peiffer, a New Orleans-based attorney who represents Silverstein, declined to comment.

For more, click here.

MasterCard Attacks EU’s Order to Cut Fees in Court Challenge

MasterCard Inc. will challenge European Union curbs on fees after the world’s second-biggest card network was accused of punishing consumers who choose to pay with plastic.

MasterCard, supported by banks including HSBC Holdings Plc and Royal Bank of Scotland Group Plc, will attack a 2007 ruling on transaction fees on cross-border credit-card payments in a case that will test whether such levies are unfair to the retailers and customers who eventually pick up the tab.

The European Commission failed to “properly identify a restriction of competition” and demanded a “disproportionate” remedy and fines, MasterCard was expected to tell the EU’s General Court in Luxembourg yesterday, according to a court summary.

Regulators globally are attacking card fees and the way they are set. The U.S. Federal Reserve Board’s decision last month to cap debit-card swipe fees at 21 cents could slice about half of the $16 billion in annual revenue reaped by card issuers including Bank of America Corp. and JPMorgan Chase & Co.

Any decision in the MasterCard case can be appealed at the region’s top tribunal, the EU Court of Justice in Luxembourg.

The case is T-111/08, MasterCard and others v. European Commission.

Interviews/Speeches

Gensler Says Rule Will Make Manipulation Easier to Prove

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, talked about the agency’s adoption of a Dodd-Frank Act rule designed to make it easier to prove fraud and manipulation in markets for derivatives and commodities such as oil and natural gas.

He spoke with Lisa Murphy on Bloomberg Television’s “Fast Forward.”

For the video, click here.

Calomiris Says U.S. Regulators Need ‘Creative Solutions’

Charles Calomiris, a professor at Columbia Business School, talked about the U.S. financial industry and housing market. “We have to get real” about subsidizing risk-taking in the housing market, Calomiris said. He also discussed minimizing bank risk and financial regulation.

He spoke with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

For the video, click here.

Comings and Goings

U.S. Antitrust Chief Varney Said to Be Leaving for Cravath

Christine Varney, the top antitrust official at the U.S. Justice Department, will leave her post next month to work for Cravath, Swaine & Moore LLP, a person familiar with the matter said.

Varney, 55, who has made her career in private practice and government in Washington, will work at the law firm’s New York headquarters, the person said.

Varney, appointed by President Barack Obama in January 2009, vowed to step up antitrust enforcement as she came into the office in April of that year. One of her first moves was to retract Bush administration guidelines on monopolization policies, saying they “raised too many hurdles” to curbing anticompetitive practices. Her replacement will selected by Attorney General Eric Holder and Obama, Varney said.

For more, click here.

--With assistance from Ben Moshinsky and Liam Vaughan in London; Sara Forden, Jesse Hamilton, Lorraine Woellert and William Selway in Washington; Andrea Tan in Singapore; Elizabeth Ody, Matthew Leising and Martin Z. Braun in New York; Stephanie Bodoni, James G. Neuger and Jim Brunsden in Brussels; and Emma Ross-Thomas in Spain. Editor: Mary Romano

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.


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