Bloomberg News

High Frequency Trades, Volcker Draft, Audits: Compliance

October 11, 2011

(Updates with Volcker Draft Special Section; margin rules in Compliance Policy; Central Bank of Italy in Comings and Goings.)

Oct. 11 (Bloomberg) -- Mary Schapiro, the chairwoman of the U.S. Securities and Exchange Commission, and regulators from the U.S., Europe and Asia will meet in London to discuss high- frequency trading, said two people with knowledge of the discussions.

The summit at the U.K. Financial Services Authority on Oct. 14 will also include Gary Gensler, chairman of the Commodities and Futures Trading Commission, and Steven Maijoor, chairman of the European Securities and Markets Authority, according to the people, who declined to comment because the meetings are private. Officials from Japan, Brazil, Italy, Spain and Canada will also attend the meetings, which will look at regulatory issues other than high-frequency trading.

High-frequency traders came under increased regulatory scrutiny following the so-called flash crash in May of last year, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The European Union is planning to impose limits on high- frequency trading firms to prevent a glut of trades from causing the system to malfunction and possibly create a disorderly market, according to draft version of the measures scheduled to be formally proposed later this month.

For more, click here.

Special Section: Volcker Rule Proposal

Volcker Rule May Cut Fixed-Income Revenue; Top Brass Responsible

U.S. regulators may begin seeking comment on Dodd-Frank Act restrictions that have already led banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. to wind down proprietary trading desks in anticipation.

The so-called Volcker rule, which would limit how banks can invest their own capital, is scheduled for consideration by the Federal Deposit Insurance Corp. board at a meeting in Washington today.

The FDIC, Fed, Securities and Exchange Commission and Office of the Comptroller of the Currency will solicit public feedback on their joint proposal by Dec. 16. A final version is slated to take effect on July 21, 2012.

The measure, crafted by the FDIC and three other agencies, is aimed at heading off risk-taking that helped fuel the 2008 credit crisis. Analysts say it could cut revenue and reduce market liquidity in the name of limiting risk.

Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under a Volcker rule proposal that may outlaw so-called flow trading, according to brokerage analyst Brad Hintz.

The draft proposal, written by regulators including the Board of Governors of the Federal Reserve System and the FDIC, forbids market-makers who trade debt securities for customers from amassing positions “in expectation of future price appreciation,” Hintz, of Sanford C. Bernstein & Co., wrote yesterday in a note to investors. Therefore, “flow trading may be prohibited.”

Such a move would cut fixed-income revenue by 25 percent and reduce profit margins by 18 percent, Hintz estimated.

Goldman Sachs Group Inc. and Morgan Stanley would be the most negatively affected if the rules were adopted because they are most dependent on fixed-income revenue, Hintz wrote.

The Volcker rule draft, also written by the Office of the Comptroller of the Currency and the Securities and Exchange Commission, was leaked last week. The proposal would be more damaging to fixed-income trading units than to equities businesses, which make a larger portion of their money from client commissions, Hintz wrote.

Separately, chief executive officers and directors of Wall Street banks, who would be responsible for setting an “appropriate culture of compliance,” would have to personally approve compliance with a ban on proprietary trading under the Volcker rule, according to the draft proposal.

Financial regulators would require senior management to establish detailed programs for ensuring their banks are following the new rules, according to the 288-page proposal dated Sept. 30 and labeled “confidential and predecisional.”

The Volcker rule was named after former Federal Reserve Chairman Paul Volcker, who has argued that banks with access to Fed lending programs should be prevented from making speculative bets with their money or from investing in hedge funds or private equity funds.

For more, click here.

Separately, drafts of the proposal have been leaking out in recent weeks. A Sept. 30 version included a ban on positions held for 60 days or less unless banks could show they weren’t proprietary, Bloomberg News reported.

The draft also included exemptions for some short-term trades, changed the way traders involved in market-making activities are compensated and made senior bank executives responsible for compliance.

Regulators are grappling with a difficult task in distinguishing between what is permitted, and potential proprietary trading that is not permitted, said Kim Olson, a principal at Deloitte and Touche LLP in New York.

The draft proposal included a series of exemptions for trades designed to hedge credit, interest rate or other specific risks.

Compliance Policy

Leterme Urges EU Bank Plan Before Talk of Deeper Greek Debt Cut

European leaders need a strategy for shoring up banks before plunging into the “sensitive” question of deeper-than- planned writedowns on Greek debt, Belgian Prime Minister Yves Leterme said.

Leterme, who was interviewed by Bloomberg News yesterday at his Brussels residence, said an Oct. 23 crisis summit should focus on boosting the 440 billion-euro ($602 billion) rescue fund instead of reopening a July accord to cut Greek bond values by an average of 21 percent.

Germany, Europe’s dominant economy, is pushing for a bigger reduction in Greece’s debt burden to forge a lasting solution to the debt crisis that has roiled markets and shaken confidence in the euro.

The search for a comprehensive fix led European leaders yesterday to push back the crisis summit by five days.

A planned upgrade of the European Financial Stability Facility, faces its sternest test today with a vote in Slovakia’s parliament. One party in the governing coalition is holding out against approval. Separately, the European Central Bank opposes Germany’s push to rewrite the euro area’s 12 week- old-rescue plan as leaders prepare the ground for a potential Greek default, a central bank official said.

German and French leaders are moving beyond the accord reached in July, which targets bank losses of 21 percent on Greek debt, amid rising pressure to stem a crisis that threatens the world economy. Chancellor Angela Merkel and President Nicolas Sarkozy Oct. 9 pledged to provide a blueprint for recapitalizing European banks that would help them survive any Greek default.

For more, click here, click here, and click here.

See EXT4 for more on the euro-area financial crisis.

Rate Derivatives Margin Rules May Cost $1.4 Trillion, Tabb Says

Interest-rate derivative users may have to set aside at least $1.4 trillion in margin payments under new rules mandated by the U.S. Dodd-Frank Act, according to research firm Tabb Group.

The costs will come in the next three to five years as derivatives based on interest-rates such as swaps are required to be processed by clearinghouses to reduce risk in the $465 trillion market, E. Paul Rowady, a TABB senior analyst, said in a report yesterday. Clearinghouses collect daily margin, monitor prices on trades and help settle defaults. LCH.Clearnet Ltd., the world’s largest interest-rate swap clearinghouse, has processed voluntary bank-to-bank trades since 1999.

The Commodity Futures Trading Commission and Securities and Exchange Commission are writing the rules now for the swap market based on last year’s Dodd-Frank Act.

Basel Levy for Systemic Banks Won’t Hit Recovery, Regulators Say

Capital surcharges of as much as 2.5 percentage points on the world’s biggest banks will have only a “modest impact” on the economic recovery and may eventually help spur growth, according to global regulators.

The proposals, coupled with other rules to force banks to build up their reserves, will cut economic output by a maximum of 0.34 percent during a transition period, the Basel Committee on Banking Supervision and the Financial Stability Board said in a report yesterday. Longer term, the combined plans will bolster output by as much as 2.5 percent a year because of the reduced risk of financial turmoil.

Regulators have clashed with lenders over the plans, with banks warning that the measures may constrain lending and hurt the economy. The Basel committee agreed to press ahead with the surcharges at a meeting last month, while proposing changes to how they calculate the size of levies individual banks should face. As many as 28 banks may face the extra capital rules, the group has said, without naming the lenders. The FSB endorsed the surcharge plans at a meeting in Zurich last week.

For more, click here.

Compliance Action

U.K. Regulator Criticizes Auditing of French Banks, FT Reports

Britain’s leading accounting regulator criticized French auditors for allowing France’s banks to report smaller losses on Greek government bonds than some European competitors, the Financial Times reported.

Stephen Haddrill, the chief executive officer of the Financial Reporting Council, told the newspaper he doesn’t see “strong auditing going on” in France.

In the first half of this year, various French banks and insurance companies posted 21 percent losses on “available for sale” Greek government bonds, rather than the writedown of 50 percent implied by market prices, arguing that trading was too sparse to be meaningful, the FT said.

China to Extend Tax on Oil, Gas Resources Nationwide Next Month

China will extend a value-based tax on oil and natural gas sales to the entire nation starting next month to help conserve energy use in the world’s fastest-growing major economy and boost local government revenue.

The tax will be 5 percent to 10 percent of sales, the government said on its website yesterday. China will apply a value-based tax on other commodities when the time is right, the government said in a separate statement.

China, which levies the tax based on volume, introduced a 5 percent tax on oil and gas sales in western Xinjiang region on a trial basis in June last year. The new tax regulation may crimp the earnings of companies including PetroChina Co. and China Petroleum & Chemical Corp., said Qiu Xiaofeng, an analyst at Beijing-based Galaxy Securities Co.

It is likely China will apply a 5 percent tax nationwide, according to Qiu.

Interviews/Speeches

Banks Report Between Neutral and Helpful for U.K., Says Winters

The report of the U.K.’s Independent Commission on Banking had an effect “between neutral and helpful” for London’s competitiveness, said Bill Winters, a commission member.

The effect on “the competitiveness of the U.K. should be between neutral and very helpful,” Winters, former co-chief executive officer of JPMorgan Chase & Co.’s investment bank, told members of the House of Commons Treasury Committee in London yesterday. “Britain’s banks will come out of this at the end of the day, having gone through some difficult times in much better and stronger shape.”

John Vickers, chairman of the commission, said there is a “low probability” of British-domiciled banks moving abroad as a result of the commission’s recommendations and that its findings were adjusted to stop that happening.

Vickers also testified that Moody’s downgrading of British banks is “benign” insofar as it reflects progress in getting the taxpayer “one step further off the hook.”

For the video, click here.

Valliere Says Wall Street Protests Reveal Deep-Seated Anger

Gregory Valliere, chief political strategist at the Potomac Research Group, discussed the so-called Occupy Wall Street protests, proposed taxes on millionaires, and the prospects for corporate-repatriation.

Valliere spoke with Pimm Fox on Bloomberg Television’s “Surveillance Midday.”

For the video, click here.

Comings and Goings

Asmussen Gets EU Parliament Committee Approval for ECB Job

German Deputy Finance Minister Joerg Asmussen won the support of the European Parliament’s Economic and Monetary Affairs Committee to succeed Juergen Stark at the European Central Bank.

The committee recommended Asmussen’s nomination to the Executive Board of the Frankfurt-based central bank, Chair Sharon Bowles told reporters after a meeting in Brussels yesterday.

Stark resigned last month after signaling his opposition to the ECB’s ramped-up program of buying sovereign bonds in a bid to tame the debt crisis. Asmussen, a trained economist, has been a key negotiator at the heart of German Chancellor Angela Merkel’s economic policy since she came to power in 2006.

The change of personnel on the Executive Board comes as Germany, France and the ECB wrestle with Greece’s debt crisis and euro countries work on measures to recapitalize European banks and a ramp-up of their crisis-fighting fund. Merkel and French President Nicolas Sarkozy vowed yesterday to produce a plan by the end of October.

Italy Needs to Name Central Bank Head, Frattini Tells La Stampa

Silvio Berlusconi’s government must urgently name Mario Draghi’s successor as head of the Italian central bank to meet a commitment with France on the seats in the European Central Bank’s Executive Board, Italian Foreign Minister Franco Frattini told La Stampa in an interview.

European Union leaders in June named Draghi as ECB President for an eight-year term starting on Nov. 1. The appointment took place after French President Nicolas Sarkozy sought assurances that Bini Smaghi would quit early to make way for a Frenchman, three officials said at the time.

--With assistance from Ben Moshinsky, Alan Purkiss and Thomas Penny in London; James G. Neuger and Jim Brunsden in Brussels; Christine Harper and Matthew Leising in New York; Winnie Zhu in Shanghai; Meera Louis, Clea Benson, Phil Mattingly, Silla Brush and Cheyenne Hopkins in Washington; Lorenzo Totaro in Rome; and Jana Randow in Frankfurt. Editor: 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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