Bloomberg News

EU High-Frequency Trades, Silvercorp, U.K. Banks: Compliance

September 06, 2011

(Updates with Bank of England in Compliance Policy; Lloyds in Compliance Action; Madoff investors’ suit in Courts; Alderman, Skinner in Interviews/Speeches.)

Sept. 6 (Bloomberg) -- High-frequency trading firms may face greater scrutiny from market regulators as part of plans drawn up by the European Union to reduce excessive risk taking.

The EU is planning to impose detailed requirements on high- frequency trading, according to a European Commission document obtained by Bloomberg News. The requirements will include safeguards to prevent high-frequency trades from “overloading the systems of trading venues,” generating “erroneous orders” or “otherwise malfunctioning” in a way that may create a disorderly market, according to the document.

Certain regulatory and supervisory measures were identified as necessary to “deal with the potential threats for the orderly functioning of markets arising from algorithmic and high-frequency trading,” the document said.

The measures are part of a wider overhaul by the commission, the 27-nation EU’s executive arm, of trading rules for financial markets following the 2008 contraction in the credit markets that followed the collapse of Lehman Brothers Holdings Inc. The commission has also sought to curb naked short-selling and trading in non-standardized derivatives.

Reuters also reported the proposed rule Sept. 2.

Compliance Policy

Investors May Seek Fast U.K. Bank Overhaul After Commission

Investors may want British banks to implement proposals from the government-appointed Independent Commission on Banking as soon as possible or risk a further loss of confidence.

People familiar with the discussions said Sept. 1 that the banks will have four years or more to overhaul their operations after the commission’s report is published on Sept. 12. It’s likely to force lenders to boost capital, introduce plans for an orderly bankruptcy and erect firebreaks around consumer units to protect taxpayers from further bank failures, according to an interim report published in April.

Investors are forcing Europe’s banks to adopt new rules on capital laid out by the Basel Committee on Banking Supervision as soon as possible, even though they don’t become mandatory until 2019, according to Shailesh Raikundlia, a banking analyst at MF Global Ltd. in London.

The government backs the idea of firewalls, or so-called ring-fencing, and other proposals from the commission, Chancellor of the Exchequer George Osborne said in June.

Bank lobbyists and analysts have warned during the past two weeks that pushing ahead with the ICB proposals would damage the U.K.’s faltering economic recovery.

John Cridland, director general of the Confederation of British Industry, said in a BBC interview this week that it would be “barking mad” to implement such plans at the moment given the U.K.’s faltering economic recovery.

King’s New Powers Mean BOE Needs Better Governance, Darling Says

Bank of England Governor Mervyn King has too much individual power and a board of directors should be put in place to improve governance of the central bank, former Chancellor of the Exchequer Alistair Darling said.

Darling said his efforts to tackle the financial crisis in late 2007 had been hampered by disagreements with King, who he considered not reappointing for a second term. The former chancellor was speaking Sept. 3 on BBC 1 television’s “Andrew Marr Show” before the publication this week of his book, “Back from the Brink.”

Prime Minister David Cameron’s government, which ousted Darling’s Labour Party from power last year, is scrapping the current system of bank regulation. The plan will create a Financial Policy Committee within the central bank chaired by King, entrenching his responsibility for financial stability as well as monetary policy.

For more, click here.

Compliance Action

Silvercorp Says Anonymous Allegation of Fraud Is False

Silvercorp Metals Inc., a miner of silver in China, said an allegation of accounting fraud contained in an anonymous letter addressed to Canadian regulators is false.

The letter circulated by e-mail alleges Silvercorp reported a profit in calendar 2010 to the U.S. Securities and Exchange Commission while posting a loss to regulators in China, Vancouver-based Silvercorp said in a statement. The letter was addressed to the Ontario Securities Commission, the company’s auditors and various media outlets, Silvercorp said.

Allegations of fraud against Sino-Forest Corp., a Hong Kong- and Mississauga, Ontario-based tree-farm operator, have heightened investors’ concern about other North America-based companies with operations in China, the world’s most populous country. Sino-Forest’s Canadian shares have plunged 67 percent since short seller Carson Block’s Muddy Waters LLC published a June 2 report alleging that the company overstated its timber holdings. Sino-Forest has denied the allegations.

The allegations against Silvercorp are “entirely bogus,” Lorne Waldman, a Silvercorp spokesman, said Sept. 2 in a telephone interview. Waldman denied the mining company was created in a so-called reverse takeover. He said Silvercorp’s auditor is Ernst & Young LLP, the same firm that audited Sino- Forest’s financial statements.

Silvercorp also said that the anonymous author said his firm held a short position in the company’s shares and intended to make his concerns known through Internet postings. The company cited Sept. 2 a “dramatic” increase in the short position of its shares. Silvercorp said it hasn’t confirmed whether the letter actually was sent to the OSC or any other organization.

Indonesia Loses Bulk of WTO Case on U.S. Clove-Cigarette Ban

While a U.S. ban on clove cigarettes that’s designed to prevent teenagers from starting to smoke is discriminatory, Indonesia failed to prove that it’s unnecessary, World Trade Organization judges said.

Indonesia argued that U.S. tobacco legislation, signed by President Barack Obama in June 2009, breaks global trade rules because it outlaws cloves and not the mint used to make menthol cigarettes. Indonesia, the world’s largest producer of clove cigarettes, or kreteks, made by companies such as PT Gudang Garam, has exports valued at $500 million a year, a fifth of which go to the U.S.

Menthol-flavored cigarettes produced by U.S. manufacturers such as Altria Group Inc.’s Philip Morris USA and Lorillard Inc. were exempted as part of a 2008 compromise by lawmakers that led Altria to endorse the legislation. Menthol cigarettes, the most popular flavor, constitute 20 percent of the U.S. market, according to Federal Trade Commission data.

Studies show that 17-year-olds are three times more likely to use flavored cigarettes than people over 25, according to the U.S. Food and Drug Administration.

“The panel’s conclusion was based, in part, on its finding that there is extensive scientific evidence supporting the conclusion that banning clove and other flavored cigarettes could contribute to reducing youth smoking,” the judges said on the trade arbiter’s website.

No one was available at Indonesia’s mission in Geneva to comment on the ruling.

Lloyds Tops List for Consumer Complaints on U.K. Bank Market

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, received more consumer complaints than any other banking group in the first half of 2011, according to the U.K. Financial Ombudsman Service.

Lloyds was the subject of 19,569 complaints between Jan. 1 and June 30, 2011, the ombudsman said in a statement today. Total complaints rose 54 percent to 149,925 during the first six months of this year, according to the ombudsman service report.

The British Bankers’ Association, an industry group, lost a court challenge in April to the FSA’s payment protection insurance guidelines. The improper sales of PPI are “likely to lead to a redress of 9 billion” pounds ($14 billion) Hector Sants, chief executive of the FSA, said in a speech in London in June.

The insurance covers payments on credit cards and mortgages in case of illness or unemployment. Customers who bought PPI rarely compared prices and terms or switched providers, and usually weren’t aware they could buy it from a firm other than their lender, the U.K.’s Competition Commission has said.

Ed Petter, a spokesman for Lloyds in London, couldn’t be immediately reached for comment.

Courts

Madoff Victims Seek ‘Rehearing’ on Fictional Profit Recovery

Investors in Bernard Madoff’s former firm asked a U.S. appeals court to review its ruling barring them from recovering money lost in the Ponzi scheme.

A federal appeals court in New York said Aug. 16 that the liquidator of the con man’s firm can ignore fictitious profits on money Madoff never invested when calculating losses and who is entitled to be repaid. The investors, in a Sept. 3 filing, asked for a “rehearing” by the full court, saying the Second Circuit Court of Appeals ruled differently in an earlier case.

In a 2004 case involving New Times Securities Services Inc., the court “accepted the position” that customers who lose money in a Ponzi scheme are entitled to insurance payments based on their account statements, the investors said in the filing.

Amanda Remus, a spokeswoman for Madoff trustee Irving Picard, didn’t immediately respond to an e-mail seeking comment on the U.S. Labor Day holiday.

Madoff, 73, is in a federal prison in North Carolina, serving a 150-year sentence for the fraud.

The case is In re Bernard L. Madoff Investment Securities LLC, 10-2378, U.S. Court of Appeals for the Second Circuit (Manhattan).

Interviews/Speeches

Rochdale’s Bove Says Mortgage Suits ‘Very Negative’ for Banks

Richard Bove, an analyst at Rochdale Securities, talked about the possibility of the Federal Housing Finance Agency suing more than a dozen large banks for misrepresenting the quality of mortgage securities sold at the height of the housing bubble and the impact punitive payments may have on the industry and economy.

Bove, who spoke with Adam Johnson, Jon Erlichman and Dominic Chu on Bloomberg Television’s “InBusiness with Margaret Brennan,” also discussed the outlook for Bank of America Corp.

Compass Point’s Jason Stewart Discusses REITs, SEC

Jason Stewart, director of research with Compass Point Research & Trading, discussed real estate investment trusts as the Security Exchange Commission seeks more information about leveraging of REITs. Stewart talked with Bloomberg’s Pimm Fox and Courtney Donohoe on Bloomberg Radio’s “Taking Stock.”

For the audio, click here.

ECB Nowotny Says European Banks Mostly ‘Adequately’ Capitalized

European Central Bank Governing Council member Ewald Nowotny said that the European Union stress test has shown that the European banking system is mostly “adequately” capitalized and that only individual areas have immediate need for reform.

In the longer, term Basel III calls for an increase of bank capital globally, Nowotny told reporters in Alpbach, Austria.

Golub Says Government Should Stay Out of Businesses’ Way

Harvey Golub, former chairman of American International Group Inc. and former chairman of American Express Co., talked about U.S. tax policy and the need for government to “get out of the way” of businesses.

Golub spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

For the video, click here.

U.K. SFO Will Look for Tax Deductions for Bribes, Alderman Says

The U.K. Serious Fraud Office is asking companies to disclose portions of their tax calculations as part of its enforcement of the country’s bribery act.

The SFO, which prosecutes white-collar crime, will look at the tax data to see if companies are claiming deductions for bribes, Richard Alderman, the agency’s director, said according to a copy of a speech prepared for an economic crime seminar at Cambridge University Sept. 5.

“What this means is that companies ought to ensure that in claiming tax deductions, they take out any amounts that have been paid by way of bribes,” he said. “If they fail to do this then they are claiming a deduction in respect of something that is specifically prohibited by Parliament as a deduction.”

Britain’s first prosecution using its new Bribery Act, considered by some lawyers to be the world’s strictest anti- corruption law, will be against a court clerk accused of taking a 500-pound ($814) bribe, the U.K.’s Crown Prosecution Service said last week.

Alderman said he didn’t agree with critics who said the act would have no effect for years. “Much has already happened,” he said. “Very many organizations have spent time already in building up their anti-corruption culture.”

Skinner Says U.K. Bank Recommendations Should Be Delayed

Chris Skinner, chairman and founder of the Financial Services Club, talked about the U.K. government-appointed Independent Commission on Banking’s recommendations to prevent another financial crisis.

He spoke with Linzie Janis on Bloomberg Television’s “Countdown.”

For the video, click here.

Comings and Goings

Finance Staff to Require Advance Approval, Irish Times Reports

The Irish Central Bank has issued a list of 42 senior positions in the finance industry where appointments require advance approval before the nominees can take up the posts, the Irish Times reported. The list encompasses a wide range of positions, from chief executive officers and directors to various investment-related jobs, the Irish Times said.

The list is part of the regulations known as the Standards of Fitness and Probity under Ireland’s Central Bank Reform Act of 2010, according to a statement on the bank’s website.

To be assigned to a listed position, a candidate must show the ability to “act honestly, ethically, and with integrity and in a fiscally sound manner,” the central bank said in the statement.

--With assistance from Jim Brunsden and Ben Moshinsky in Brussels; Blanche Gatt, Gavin Finch, Eddie Buckle and Howard Mustoe in London; Christopher Donville in Vancouver; Zoe Schneeweiss in Vienna; Linda Sandler in New York; and Jennifer M. Freedman in Geneva. Editors: Andrew Dunn, Glenn Holdcraft.

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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