Bloomberg News

Agency Funding, Energy Rules, Options Floors: Compliance

September 15, 2011

(Updates with CFTC-energy firms in Compliance Policy, SEC- Citigroup in Compliance Action, HSBC in Courts and Sobolewski in Interviews/Speeches.)

Sept. 15 (Bloomberg) -- A U.S. Senate panel approved a bill that would increase funding for financial-industry regulators as Democrats counter Republican efforts to reduce spending for agencies implementing the Dodd-Frank Act.

The Securities and Exchange Commission would get an additional $222 million for fiscal 2012 and the Commodity Futures Trading Commission another $37.7 million under a $21.7 billion draft spending bill approved yesterday by a Senate appropriations subcommittee in a voice vote.

The SEC and CFTC, which are responsible for writing most of the new rules required by the financial-regulation overhaul enacted last year, have been caught in a tug-of-war between Republicans pushing to cut federal spending and Democrats aiming to give regulators funding to complete work on the rules. The increases in the Senate bill would represent a 19 percent boost, to $1.4 billion, for the SEC and an 18 percent rise, to $240 million, for the CFTC.

The House of Representatives in June passed a spending bill that would cut the CFTC’s budget by 15 percent, or $30 million from its current spending level, and is waiting to act on a committee-approved bill that denied President Barack Obama’s request to increase the SEC’s funding.

Under the law, the Consumer Financial Protection Bureau is to be funded from a percentage of the Federal Reserve’s budget, as much as $500 million a year, with the bureau’s director deciding how much is needed.

For more, click here.

Compliance Policy

CFTC Should Re-Propose Swap-Dealer Definition, O’Malia Says

The U.S. Commodity Futures Trading Commission should redefine which companies are considered swaps dealers because the drafted rules could put an unnecessary burden on commercial energy firms, CFTC member Scott O’Malia said.

If such companies are labeled dealers under the new law, they would face margin and clearing requirements that “could devour firms’ balance sheets and force them to make difficult decisions between making new investments and hedging their current commercial exposure,” O’Malia said in a speech to a Futures Industry Association conference in New York yesterday. The rule, which is scheduled to be considered at a mid-October meeting, should be re-proposed to have a more “risk-based approach,” he said after the speech.

The CFTC and Securities and Exchange Commission are drafting rules under the Dodd-Frank Act governing the $601 trillion swaps market, which includes trades conducted by Citigroup Inc., JPMorgan Chase & Co. and Cargill Inc. Dodd- Frank, the financial-overhaul enacted in July 2010, aims to reduce risk and boost transparency after largely unregulated trades helped fuel the 2008 credit crisis.

Companies defined as dealers and major swap participants will face clearing rules that lead to requirements to post margin, or collateral, to reduce risk in the trades.

The SEC has scheduled a Sept. 19 meeting to propose rules governing registration of swap dealers and other major swap participants for derivatives tied to securities.

For more, click here.

Special Section: Energy Market

EU Draft Financial Rules on Spot CO2 ‘Inadequate,’ IETA Says

The European Union’s draft proposal to classify spot carbon contracts as financial instruments is a “hurried and inadequate response” to the need of improving trading security, a carbon traders’ association said.

The International Emissions Trading Association called on the European Commission to “remove the classification of allowances as financial instruments from the forthcoming Mifid review proposal,” according to a letter published yesterday.

The commission opted to extend its Markets in Financial Instruments Directive, or Mifid, to cover spot carbon deals rather than design a tailor-made regime, according to the draft proposal obtained by Bloomberg News earlier this week. The European Commission Director-General for climate, Jos Delbeke, rejected IETA’s criticism, saying the lobby group has “long been calling for a genuine oversight regime” for the carbon market.

While carbon futures are already subject to Mifid and the Market Abuse Directive, known as MAD, contracts for spot delivery, accounting for about 10 percent of trading, typically aren’t seen as financial instruments and aren’t bound by the same laws.

The commission has said it will present the draft to revise Mifid around October.

For more, click here.

For commentary by Jos Delbeke, click here.

EU Toughens Oversight of Energy Trading to Fight Market Abuse

The European Union toughened oversight of energy trading in a bid to prevent market manipulation and ensure fair prices.

The European Parliament voted to establish independent monitoring of wholesale energy trading across the 27-nation EU. The new legislation, to take effect in the coming months, will cover contracts and derivatives for the supply and transportation of natural gas and electricity.

The tighter rules will require companies to inform the EU’s Agency for the Cooperation of Energy Regulators about contract information before trades can take place and ban transactions that give false signals about supply and demand. National penalties for breaches will have to reflect the damage done to consumers.

The law will enter into force 20 days after its publication in the EU’s Official Journal.

EU Nations Back Rules to Buy CO2 Auctioning Infrastructure

European Union nations agreed rules to buy systems for the sale of carbon-dioxide permits, paving the way for a tender to buy an auction platform and appoint a monitor, the EU regulatory arm said.

The EU Climate Change Committee, including representatives of national governments, approved an agreement on the common auction platform to sell carbon allowances for the next phase of the EU emissions trading system, the commission said yesterday in a statement in Brussels. The committee also backed the agreement to appoint a monitor to observe all auctions.

“The commission aims to launch the calls for tender on its own account and on behalf of the member states around the turn of the year,” it said. “The endorsements keep the commission and the Member States on track to start the auctions of emission allowances for phase 3 in the second half of 2012.”

The EU, which has given away the majority of allowances since starting its cap-and-trade program in 2005, will require most emitters to purchase their permits in the eight-year period that starts in 2013, often referred to as phase 3. While 24 of the EU’s 27 nations agreed to have a common auctioning platform, Germany, Poland and the U.K. opted to develop national systems.

For more, click here.

Australia Emitters Can Choose CO2 Trade Over Tax, Cut Costs

Australian emitters may choose to opt into the nation’s proposed carbon-trading program instead of facing increased fuel taxes, which may cut their costs.

The opt-in will apply from July 1, 2013 to allow for implementation two years before the start of the carbon market. The greenhouse-gas curbing plan includes a tax for the three years starting July next year, when prices are set at A$23 ($23.51) a metric ton.

When emissions trading starts in July 2015, emitters can buy domestic allowances or potentially cut costs by buying Australian and international offset credits.

Compliance Action

Clearwire and Oxigene Are Latest U.S. Stocks to Be Halted

Oxigene Inc. and Clearwire Corp. are the latest U.S. stocks halted by circuit breakers implemented in June 2010.

The curbs were created after the 20-minute rout on May 6, 2010, erased $862 billion from the value of U.S. equities before prices rebounded. New rules proposed by exchanges on April 5, 2011, would shift the market to a limit-up/limit-down system that prevents shares from moving more than a certain amount.

Fewest Finance Executives Since 2008 Apply for FSA Approval

The U.K. Financial Services Authority has so far this year received the fewest number of applicants for approval to serve in senior finance posts since 2008.

Applications to be interviewed by the U.K. supervisor for so-called approved person status, required to take a senior role at a financial firm, have dropped 43 percent to 169, according to a study by law firm McGrigors LLP. Fifteen applications were withdrawn following the FSA interview.

The London-based FSA is imposing stricter supervision after being criticized for failing to prevent the U.K.’s worst financial crisis since World War II in 2008.

Barroso Praises Greek Steps, Vows Euro-Bond Options Paper

European Commission President Jose Barroso called Greece’s latest budget-austerity measures “significant” and pledged to present options “soon” for joint bond sales by euro-area nations, saying efforts to contain the debt crisis must be stepped up.

The Greek government decided on Sept. 11 to cut one month’s wages from all elected officials and impose an annual charge on all property for two years in a bid to qualify for another installment of international aid. The aim is to meet 2011 and 2012 targets for narrowing the budget deficit and to cover a shortfall for this year that has been exacerbated by a deepening recession, according to Finance Minister Evangelos Venizelos.

Greece is seeking this month to win a sixth tranche of loans under last year’s 110 billion-euro ($150 billion) aid package from the euro area and International Monetary Fund and to avoid a default. It also wants to benefit from a planned second aid package of 159 billion euros approved by euro-area leaders on July 21.

For more, click here.

SEC, Citigroup in Talks to Settle Mortgage-Bond Deal, WSJ Says

The U.S. Securities and Exchange Commission is in “advanced” talks with Citigroup Inc. to settle charges related to a $1 billion mortgage-bond deal, the Wall Street Journal reported, citing people familiar with the situation.

The settlement would be for more than $200 million, the newspaper said, citing the people it didn’t identify.

The deal, called Class V Funding III, was a collateralized debt obligation made up of other CDOs and backed by subprime mortgages, the Journal said. It was created in 2007, the newspaper said.

Officials are looking into whether Citigroup held any short positions in the deal, the Journal said.

Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment on the report to Bloomberg News.

Courts

HSBC Dropped From Lawsuit Alleging Silver Futures Manipulation

HSBC Holdings PLC is no longer a defendant in a lawsuit by investors who claimed the bank and JPMorgan Chase & Co. manipulated silver futures and options prices in violation of U.S. antitrust law.

The investors said in consolidated class-action complaint filed yesterday that they signed a tolling agreement with HSBC and weren’t naming the bank as a defendant. Tolling agreements are often used to stop statutes of limitation from running while the parties discuss settlement or dismissal of a claim.

The investors claim that, starting in March 2008, the banks colluded to suppress silver futures so that call options would decline and put options would increase, according to the complaint filed in federal court in Manhattan.

The Commodity Futures Trading Commission began probing allegations of price manipulation in the silver futures market in September 2008.

A call to London-based HSBC seeking comment on the matter after regular business hours yesterday wasn’t immediately returned. Joseph Evangelisti, a spokesman for New York-based JPMorgan Chase, declined to comment.

The case is In re Commodity Exchange Inc. Silver Futures and Options Trading Litigation, 11-cv-2213, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

U.S. Options Floors May Disappear, Goldman’s Hohman Says

U.S. options exchanges are likely to shift away from running trading floors where people gather to make markets because of competition from electronic trading, Todd Hohman, a Goldman Sachs Group Inc. executive said yesterday.

“We’ll probably see the end of the floors” within five years, he said.

Hohman, a partner at the firm, made the remarks at a conference in New York sponsored by the Futures Industry Association and Options Industry Council.

Exchanges that used to process all trades through market makers and brokers on their floors now also match buy and sell orders electronically after rivals promising faster executions drew away orders. Four of the nine U.S. equity derivatives markets -- the Chicago Board Options Exchange, NYSE Amex Options, and Nasdaq OMX PHLX -- have floors and also let investors place transactions electronically. Most exchanges in Europe are primarily or fully electronic.

The Goldman Sachs executive said floors cater to traders seeking to execute prearranged transactions or large orders. The Securities and Exchange Commission’s approval in February of a so-called qualified contingent cross proposed by the International Securities Exchange may be a sign that the regulator is preparing “to allow more option printing and crossing,” he said.

Hohman is in charge of volatility strategies at a global quantitative trading group at Goldman Sachs.

NYSE Amex won permission in June from the SEC to sell an almost 53 percent stake to seven brokers, which agreed to send orders to the platform in exchange. New York-based Goldman Sachs owns 14.95 percent of the NYSE Options joint venture.

Warsaw Exchange’s Sobolewski Seeks to Boost Debt Trading

Ludwik Sobolewski, chief executive officer of the Warsaw Stock Exchange, talked about prospects for additional growth of the exchange this year, the outlook for the listing of additional foreign companies and proposed changes to Polish law as part of an effort to boost the bourse’s corporate debt- trading platform.

A proposal to let banks trade bonds without using a broker was sent to the Finance Ministry in July. Sobolewski spoke with Bloomberg’s Pawel Kozlowski in Warsaw on Sept. 13.

For the video, click here.

Comings and Goings

China Names Chen Wenhui Vice Chairman of China CIRC

China named Chen Wenhui as vice chairman of China Insurance Regulatory Commission, replacing Wei Yingning, according to a statement on the Chinese government website yesterday.

--With assistance from Ben Moshinsky and Mathew Carr in London; Jonathan Stearns in Strasbourg, France; James G. Neuger and Ewa Krukowska in Brussels; Donal Griffin, Sylvia Wier, Bob Van Voris, Nick Baker and Nina Mehta in New York; and Phil Mattingly and Silla Brush in Washington. 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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