Bloomberg News

ICB’s 2015 Deadline, Deutsche Boerse EU Probe: Compliance

September 02, 2011

(Updates with U.K. banking lobby, EU naked sovereign swaps in Compliance Policy; FSA-Geddis, BlackRock in Compliance Action; DAD-DAT tax decision in Courts; and Coene in Interviews.)

Sept. 2 (Bloomberg) -- British banks won’t be compelled to implement proposals from the government-appointed Independent Commission on Banking until 2015 at the earliest, according to a person with knowledge of the discussions.

The date is the soonest possible for the commission’s recommendations, said the person, who declined to be identified because the talks are private. Introducing the new rules as late as 2018 has also been discussed, the person said.

The process will take years rather than months because the issues are complex, a government official said.

With the ICB due to report on Sept. 12, banks and industry lobbyists have argued that any new rules should be postponed because of the U.K.’s faltering economic recovery. The commission, led by John Vickers, 53, an Oxford academic, recommended in April that the U.K.’s biggest banks should boost capital, introduce plans for an orderly bankruptcy and erect firebreaks around consumer units to protect taxpayers from further bailouts.

Business Secretary Vince Cable, a Liberal Democrat, and Chancellor of the Exchequer George Osborne, a Conservative, will not respond to the report with immediate proposals for legislation, a person with knowledge of the coalition government’s thinking on bank regulation said last month. Instead, the Cabinet’s banking committee will consider what action to take and put forward plans before the end of the year.

A parliamentary bill to implement ICB recommendations will need to be approved by both the House of Commons and the House of Lords before it can receive assent from Queen Elizabeth II and become law.

Compliance Policy

Deutsche Boerse Customers Quizzed for Second Time in EU Probe

Deutsche Boerse AG and NYSE Euronext customers and over- the-counter derivatives platforms were quizzed for a second time by European Union regulators examining the effect of the $7.46 billion exchange deal on competition.

The European Commission asked 106 questions about what Bats Global Markets, Chi-X Europe Ltd. or The Order Machine would need to succeed in derivatives trading. Separately, customers were asked 98 questions about the difference in fees paid for trading on exchanges or over-the-counter for a single stock option, equity index option or an interest rate future/forward.

Deutsche Boerse’s offer for NYSE Euronext would put more than 90 percent of the region’s exchange-traded derivatives market and about 30 percent of European stock trading in the hands of one organization. The EU opened an expanded probe into the deal last month, citing concerns over reduced innovation.

Regulators seek comments from competitors and customers when they examine whether a large takeover may harm competition.

Amelia Torres, a spokeswoman for the European Commission, declined to comment on the questionnaire. Naomi Kim, a spokeswoman for Deutsche Boerse in New York, and James Dunseath, a spokesman for NYSE Euronext in London, both declined to immediately comment.

Joaquin Almunia, the EU’s competition chief, said last month that the proposed merger “would remove a strong competitor from the market and would give the merged company by far the leading position in derivatives trading in Europe.”

The EU’s antitrust agency has set a deadline of Dec. 13 to rule on the deal.

Regulators to Set Tougher Shadow-Bank Rules by October, FSB Says

Global regulators will reach a deal on tougher regulation and oversight of hedge funds and other so-called shadow banks by October in an effort to prevent them being used by lenders to take excessive risks. Further work will continue in 2012, with additional policy recommendations to be published by July.

Authorities in the Group of 20 countries are to probe shadow bank activities including securitizations and repurchase agreements, the Financial Stability Board said in a statement on its website. The board will also examine whether regulated lenders hold enough capital against their transactions with “shadow-banking entities.”

“Authorities will narrow down their focus to non-bank credit intermediation that has the potential to pose systemic risks,” according to the FSB, which was founded in 2009 and brings together G-20 nations regulators and finance ministries as well as international standard-setting organizations.

Authorities have warned that shadow banks such as structured investment vehicles, hedge funds and money-market mutual funds could be used to evade regulators’ attempts to clamp down on excessive risk taking in the wake of the global credit crunch and subsequent lender bailouts. The shadow-banking system had liabilities of about $16 trillion in the first quarter of 2010, the Federal Reserve Bank of New York said in a report last year.

UKFI Says Reforms May Reduce Value of U.K. Bank Stakes, Sky Says

U.K. Financial Investments Ltd., the agency that manages taxpayers’ stakes in British banks that received government bailouts, has said introducing new banking rules proposed by the Independent Commission on Banking could reduce the value of the shareholdings by up to 10 billion pounds ($16 billion), Sky News reported in a blog on its website, citing a “secret report” presented to the U.K. Treasury and the members of the Independent Commission on Banking.

UKFI also said the stakes would be much more difficult to sell if the changes to the structure of British banks are implemented, because they would make the U.K. banking industry more unattractive than those in other countries, Sky said, citing the report.

Traders May Face EU Position Limits on Naked Sovereign Swaps

Banks and financial firms may face European Union limits on sales of so-called naked credit-default swaps for sovereign debt as part of proposals to prevent the products from exacerbating the region’s debt crisis.

Under the draft plans by the European Commission obtained by Bloomberg News, traders would be banned from exceeding thresholds set by the European Securities and Markets Authority for buying insurance against default on sovereign debt they don’t actually own.

ESMA would “establish for each sovereign issuer a position limit for uncovered positions in credit-default swaps relating to” that country, according to the document prepared for negotiations on an EU short-selling law. National regulators would submit data to ESMA every six months to help set the thresholds.

German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for the EU to ban naked credit-default swaps on sovereign debt over concerns the securities fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

The need for curbs on sovereign CDS has been one of the main dividing lines between the parliament and governments in the 27-nation region in their attempt to agree on an EU short selling law. A spokeswoman at the European Commission couldn’t be immediately reached to comment.

For more, click here.

Cameron Receptive to Banks’ Lobbying on Reforms, FT Reports

U.K. Prime Minister David Cameron is becoming receptive to lobbying by banks about new banking rules to be proposed by the Independent Commission on Banking, the Financial Times reported, citing an unidentified government official.

Cameron will express his concerns about the possible effect of the proposals on the economy when he meets with Chancellor of the Exchequer George Osborne, Business Secretary Vince Cable and Deputy Prime Minister Nick Clegg at a planned meeting next week, the newspaper said, citing an unnamed government official.

Compliance Action

Insurers, EU to Discuss Auto Insurance Court Ruling This Month

Insurance companies will meet with the European Union justice commissioner this month to assess the impact of a court ruling that outlaws cheaper premiums for female drivers, the EU said.

Viviane Reding said she would host “a summit with business leaders from the insurance industry in September to discuss the implications of the judgment,” she said in an answer to a parliamentary question dated Aug. 23. Insurers have until the end of 2012 to make legal changes, she said.

The talks will take place on Sept. 21 and focus on how insurers can adapt to a legal framework that will require changes to insurance policies across the 27-nation bloc, Matthew Newman, a spokesman for Reding, said in a phone interview. He declined to say which companies were invited to the discussions.

Auto insurance premiums for female drivers could rise as much as 50 percent as a result of the March 1 ruling from the EU Court of Justice, KPMG LLP said. The present system “works against the achievement of the objective of equal treatment” for men and women and should end by the end of next year, the court said in its decision.

FSA Loses Bid to Ban Ex-Commerzbank Trader Over Lead Contracts

A former metals trader at Commerzbank AG’s Dresdner Kleinwort unit won a U.K. tribunal ruling preventing the Financial Services Authority from banning or fining him in a market abuse case over lead contracts.

A U.K. tribunal limited the FSA to censuring Jason Anthony Geddis over the 2008 trades on the London Metal Exchange, the regulator said in a statement today. Geddis had challenged the FSA’s decision issued last year.

The FSA banned 71 people from working in the industry and issued fines of 98.5 million pounds ($159.6 million) in the year that ended March 31, 2011, according to the regulator’s annual report. The regulator alleged Geddis committed market abuse and violated LME trading guidelines by building a position of more than 90 percent of warrants for lead stockpiles, without lending back to the market.

Geddis’s lawyer, Michael Segen of Segens Solicitors in London, didn’t immediately return a call for comment.

BlackRock Seeks SEC Permission to Open 13 Actively Managed ETFs

BlackRock Inc., the largest provider of exchange-traded funds, is seeking permission to open 13 actively managed ETFs.

The funds would invest in a variety of equity categories such as large and mid-size companies, and include versions free to bet on both rising and falling prices, according to a filing by New York-based BlackRock yesterday with the U.S. Securities and Exchange Commission. Unlike most ETFs, the funds wouldn’t disclose their holdings daily.

ETFs hold baskets of securities, commodities or other assets while trading throughout the day like individual stocks.

Courts

U.K. Regulator Wins Order in Second ‘Layering’ Market-Abuse Case

The U.K. financial regulator won an order barring a Swiss asset-management firm from using “layering” to manipulate shares, the second penalty this week involving the practice compared to high-frequency trading.

Judge Guy Newey in London Aug. 31 granted a temporary injunction against Da Vinci Invest Ltd. and extended a previous asset freeze on individuals at the firm. Andrew George, a lawyer for the Financial Services Authority, said senior management at the U.K.-registered firm was aware of irregularities in trading. The FSA said four traders were responsible for the market abuse at the Unterageri, Switzerland-based company.

Illegal profit from the layering, in which traders place large orders they have no intention of allowing to go through, may have been 1 million pounds ($1.6 million), the FSA said in a statement yesterday. The regulator Aug. 31 said it fined Swift Trade Inc. 8 million pounds in a case involving layering.

Hendrik Klein, the chief executive officer of Da Vinci, opposed the injunction at the hearing Aug. 31, saying whatever had happened in the past, it wouldn’t be repeated. Klein said he had funded four Hungarian traders and hadn’t investigated their trades. The pattern of activity identified by the FSA was similar to so-called high frequency trading, he said.

Klein told the judge he had been hurt by the asset freeze and wasn’t able to hire lawyers.

The FSA has said that Da Vinci has “legitimate business” in Switzerland.

The case is: The Financial Services Authority v. Da Vinci Invest Limited & Ors, 11-02409.

Diamondback Capital’s Scolaro Settles SEC Insider-Trading Case

Anthony Scolaro, an ex-portfolio manager for Diamondback Capital Management LLC, agreed to pay about $203,000 to settle an insider-trading lawsuit filed against him by the U.S. Securities and Exchange Commission.

Scolaro, 50, accused of reaping $1.1 million for his firm by trading on inside information about Axcan Pharma Inc. late in 2007, agreed to disgorge $140,400 in principal and interest and pay a $63,000 penalty, the SEC said in a statement.

The allegations were related to a criminal case in which Scolaro pleaded guilty to insider-trading charges stemming from the Galleon Group LLC investigation, the agency said Aug. 1 in a complaint in U.S. District Court in New York.

Scolaro’s November 2010 plea of guilty to insider trading was unsealed in May. He hasn’t been sentenced. His attorney, William Brodsky, didn’t immediately reply to a telephone message seeking comment on the Aug. 1 filing.

The civil case is SEC v. Diamondback Capital Management LLC, 11-cv-6112, in the U.S. District Court, Southern District of New York (Manhattan).

Tax Court Rules Against Chicago Lawyer’s Distressed-Debt Deals

The U.S. Tax Court ruled that a distressed-debt transaction promoted to clients by Chicago lawyer John Rogers was invalid.

The deals involving Brazilian consumer debt featured transactions among U.S. taxpayers and a company in the British Virgin Islands. The government calls the transactions the Distressed Asset Debt and Distressed Asset Trust tax shelters, or DAD and DAT.

“There has been no showing of reasonable cause or good faith on Rogers’ part in conceptualizing, designing and executing the transactions,” wrote Judge Robert A. Wherry in a decision released yesterday. “Instead, Rogers’ knowledge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming and that these transactions would be re-characterized and stepped together to reveal their true substance.”

Last year, the U.S. Justice Department sued Rogers to prevent him from promoting the transactions. In its statement at the time, the government said Rogers had generated more than $370 million in improper tax deductions for more than 100 clients. That case is pending in federal court in Chicago.

Paul Kozacky, Rogers’ attorney in the Tax Court case, didn’t immediately return a request for comment on the ruling.

Rogers was a partner at Seyfarth Shaw LLP in Chicago until 2008, when the firm required him to resign because he had continued to promote the tax shelters, the government said.

Interviews/Speeches

Levitt Says CFTC Plan Is Necessary for Transparency

Former U.S. Securities and Exchange Commission Chairman Arthur Levitt says the Commodities Futures Trading Commission should push for transparency in traders’ positions. Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Coene Calls Liquidity Primary Bank Problem, Libre Belgique Says

European Central Bank Governing Council member Luc Coene said liquidity is the primary problem facing Europe’s banks, La Libre Belgique reported, citing an interview.

“The problem that arises in Europe in the first place is that of liquidity,” Coene told the newspaper. “The banks have again lost a little confidence” and they “aren’t lending to each other,” he was quoted as saying.

“The situation isn’t as bad as in 2008-2009, but we see that we’re going little by little in that direction,” Coene said in the interview. “I hope for the return of calm on the markets after September when all the measures will be effectively put in place.”

--With assistance from Aoife White, Jim Brunsden and Ben Moshinsky in Brussels; Erik Larson, Sarah Halls, Blanche Gatt, Gavin Finch and Robert Hutton in London; Patricia Hurtado in New York; Christopher Condon in Boston; Richard Rubin in Washington; and Andrew Harris in Chicago. 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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