Bloomberg News

Citigroup Japan Probe, Volcker Rule, Recruiting: Compliance

October 12, 2011

(Updates with ASIC fees in Compliance Policy, Volcker Rule and former United Commercial executives in Compliance Action and Sprecher in Interviews/Speeches.)

Oct. 12 (Bloomberg) -- Citigroup Inc. stopped soliciting clients for some retail banking products in Japan as it awaits the outcome of a government investigation into its compliance with local rules, two people with knowledge of the matter said.

The U.S. bank told employees at its Japan retail unit in late June not to market financial products such as investment trusts and foreign currencies, said the people, who declined to be identified as the information is confidential.

Citibank Japan Ltd. is reviewing its compliance processes and offering training to staff to improve internal controls, the people said. Citigroup, which has 32 branches and offices in Japan with 1,780 employees, still helps customers exchange currencies or buy products if asked, they said.

Mika Nemoto, a Tokyo-based spokeswoman for Citigroup, declined to comment on the lender’s response to the investigation.

The U.S. bank faces a possible penalty from the Financial Services Agency in Japan by as early as Dec. 31 for failing to fully explain product risk to retail customers, two people familiar with the situation previously said.

Compliance Policy

Dodd-Frank’s Volcker Rule Released by Regulators for Comment

U.S. regulators requested public comment on Dodd-Frank Act restrictions that would ban banks from making short-term trades for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds.

The so-called Volcker rule, released yesterday by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, is aimed at heading off risk-taking that helped fuel the 2008 credit crisis.

The language of the rule is little changed from drafts that have been leaking in recent weeks. It would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated, and make senior bank executives responsible for compliance.

The board of the FDIC voted 3-0 yesterday to seek comments on the proposal through Jan. 13. The Federal Reserve also said it would accept feedback by that date.

For more, click here.

CFTC May Finish Curbs on Speculation for Oct. 18, Gensler Says

The top U.S. commodities regulator may complete Dodd-Frank Act limits on speculation in oil, natural gas and other markets at an Oct. 18 Washington meeting, said Gary Gensler, chairman of the Commodity Futures Trading Commission.

At the same meeting, the agency’s five commissioners may also vote on rules governing clearinghouses that stand between buyers and sellers in derivatives markets, Gensler said in a speech prepared for a Futures Industry Association conference yesterday in Chicago. In addition, the agency may vote to delay until next year regulations that were originally scheduled to be completed by last July and already were postponed to the end of the year.

The CFTC and Securities and Exchange Commission, which are leading U.S. efforts to write new derivatives rules, are also working on a final rule that will define which Wall Street banks, energy firms and other companies are considered swap dealers or other major swap participants. Those definitions will lead companies to have higher capital and margin requirements to limit risk in trades.

A requirement to clear swaps may not take effect until the second quarter of 2012 with some smaller participants in the derivatives markets having an additional nine months to comply, Gensler said.

Stockbrokers Balk at Australian Fees to Fund New Regulator

Plans to make users of Australia’s securities markets pay some of the costs of regulation are too expensive and unfair, according to brokers, exchanges and industry associations.

The complaints are contained in industry responses to a plan by the Australian Treasury to raise almost A$30 million ($29.9 million) in the first 18 months toward the budget of the Australian Securities and Investments Commission, the country’s market regulator. The government is proposing flat supervision fees for exchanges based on market share, charges for the cost to connect to new technology platforms and imposts for both trades and computer messages for market participants.

ASIC, as the regulator is known, took over direct supervision of financial markets in August 2010 from the country’s main bourse, ASX Ltd. The transfer was part of a plan by the Labor Party government of Prime Minister Julia Gillard to turn Australia into a financial hub by introducing competition in the Asia-Pacific’s fourth-largest equity market. Opponents of the charges say the plan will deter new operators.

The total estimated cost recovered by Treasury from the charges will be A$29.8 million in 18 months from Jan. 1, 2012, to June 30, 2013. The charges will be reviewed after that.

A major point of contention among industry participants is a proposed fee related to computer messaging by brokers using ASIC’s computer system to execute trades. A draft consultation by Treasury says it intends to charge more to those with greater trading volume.

A response submitted by the Australian Financial Markets Association, which represents more than 140 banks, brokers, securities companies, fund managers and trading companies, notes this inherently charges more to traders using high-frequency strategies.

For more, click here.

Compliance Action

Goldman May Drop Bank Status on Volcker Rule Cost, Hilder Says

Goldman Sachs Group Inc. and Morgan Stanley may consider dropping their status as bank holding companies to avoid expenses tied to the Volcker rule, said David Hilder, an analyst at Susquehanna Financial Group LLP.

The Volcker rule in its current form would impose costs on lenders and drive capital to non-bank market makers, causing the two New York-based firms to consider whether to stop being banks, Hilder said in a note yesterday, when four regulatory agencies issued a 298-page draft of the rule for public comment.

Goldman Sachs and Morgan Stanley were the biggest U.S. securities firms before they converted to bank holding companies after the September 2008 bankruptcy of Lehman Brothers Holdings Inc. Both became subject to regulation by the Federal Reserve and won access to central bank programs such as the discount window, which are designed to protect deposit-taking banks.

David Konrad, a bank analyst at KBW Inc., said in a telephone interview that Goldman Sachs and Morgan Stanley are unlikely to change their status as bank holding companies to dodge the Volcker restrictions because Congress would then amend the rule to include systemically important banks rather than holding companies.

Goldman Sachs Chief Financial Officer David Viniar said Jan. 21, 2010, the same day President Barack Obama announced his support for the Volcker rule, that it was “unrealistic” to imagine the firm won’t be a federally supervised bank.

The rule was included in last year’s regulatory overhaul to rein in risky trading.

Stephen Cohen, a Goldman Sachs spokesman, and Morgan Stanley’s Mark Lake declined to comment.

EBA Asks Banks for More Debt Information in Capital Review

The European Union’s top banking regulator asked lenders for more information on sovereign debt holdings as part of its review of financial industry capital levels, four people familiar with the situation said.

The European Banking Authority asked banks for “the difference between the book value and the fair value of sovereign assets” in their “held to maturity and loans and receivables portfolios,” according to a data template seen by Bloomberg News. Banks were also asked for “relevant changes” to their balance sheet made since June.

Ben Fischer, a spokesman for German financial regulator Bafin, said in an interview that the request for information isn’t a new stress test. He described it as “more of an update of numbers on foreign exposure, a follow-up to the old stress test.”

European Commission President Jose Barroso is expected to propose measures today to recapitalize banks gripped by the region’s sovereign-debt crisis. Heads of state are scheduled to meet in Brussels later this month to discuss the proposals.

Lenders haven’t been told what the EBA intends to do with the anticipated data, said one of the people, who declined to be identified because the process is private.

Fed Requests Comment on Simplifying Reserve Requirement Rule

The Federal Reserve requested comment on proposed rules that would simplify so-called Regulation D, a rule focused on reserve requirements for banks.

The proposals are “intended to simplify the administration of reserve requirements and reduce administrative and operational costs for both depository institutions and Reserve Banks,” the Fed said yesterday in a statement in Washington.

The rules would create a common two-week maintenance period for all depository institutions, set up a “penalty-free band” around reserve balance requirements and eliminate the contractual clearing balance program. The Fed is seeking comment within 60 days of the proposed rule’s publication in the Federal Register.

Banks May Face Fraud, Municipal Claims After Settlement

U.S. banks may still face state securities-fraud claims and municipal lawsuits over unpaid mortgage fees under a settlement that is “getting closer,” the official leading talks for state attorneys general said.

Iowa Attorney General Tom Miller said in an interview Oct. 10 that any settlement wouldn’t prevent a growing number of municipalities from suing banks for allegedly cheating them out of millions of dollars in filing fees, or individual states from pursuing securities claims against banks.

State attorneys general and federal officials have been negotiating a settlement with the largest mortgage servicers. Officials are seeking an agreement that would fund loan modifications for homeowners and set requirements for how the banks conduct foreclosures.

For more, click here.

Bank Failures Will Cost $19 Billion Through 2015, FDIC Says

U.S. bank failures through 2015 will drain $19 billion from the Federal Deposit Insurance Corp. fund for covering losses from shutdowns, the agency said in an update of its reserve ratio projections.

The $19 billion figure reported by the FDIC yesterday is a decrease from the estimated $23 billion needed to cover bank failures in 2010, reflecting both the slowing rate of bank shutdowns and the impact of assessment increases imposed by the FDIC to bolster the Deposit Insurance Fund.

Yesterday’s report shows that the FDIC may have gone farther than it needed to in increasing assessments, according to James Chessen, chief economist for the American Bankers Association.

Failed Bank’s Executives Sued by SEC for Concealing Losses

Three former United Commercial Bank executives misled investors by concealing at least $65 million in loan losses before the San Francisco-based lender collapsed in 2009, the U.S. Securities and Exchange Commission said.

Thomas Wu, who was the bank’s chief executive officer, worked with chief operating officer Ebrahim Shabudin and senior officer Thomas Yu to hide impaired assets from auditors, causing UCBH Holdings Inc. to understate 2008 operating losses, the SEC said in a complaint filed yesterday in California. Shabudin and Yu will face related criminal fraud charges under a federal grand jury indictment unsealed in San Francisco.

“Hundreds of banks have failed in the financial crisis and the regulators need to blame someone,” Steven Bauer, Wu’s attorney at Latham & Watkins LLP, said in a statement. “Thomas Wu is counting on our justice system to clear his good name.”

United Commercial was one of the 10 biggest bank failures to result from the 2008 credit crisis, causing a $2.5 billion loss to the Federal Deposit Insurance Corp.’s insurance fund, the SEC said.

Craig On, the bank’s former chief financial officer, separately agreed to pay $150,000 and accept a five-year suspension from practicing before the SEC to resolve claims that he helped the fraud, the agency said. On, 59, didn’t admit or deny wrongdoing in settling the SEC’s claims.

Phone calls to James Lassart, a lawyer for Shabudin; Stephen Kaus, a lawyer for Yu; and Nanci Clarence, an attorney for On, weren’t returned.

The FDIC said yesterday in a separate release it fined 13 former United Commercial employees more than $1.7 million combined.

Interviews/Speeches

Trading Rebates on Exchanges Should End, ICE’s Sprecher Says

The pricing system used by the majority of U.S. stock exchanges should be banned because it encourages trading aimed only at collecting rebates, according to Jeffrey Sprecher, chief executive officer and chairman of IntercontinentalExchange Inc.

Regulators shouldn’t let venues offer maker-taker pricing, in which an exchange charges some firms to trade and gives others rebates, Sprecher said yesterday at a Futures Industry Association conference in Chicago. He said the pricing structure discourages some traders from owning stock.

The number of U.S. stock and options exchanges has risen to 13 and nine, respectively, and one way they try to differentiate themselves is with pricing plans. Maker-taker pricing is mainly used to compensate market makers and other providers of bids and offers, while traders who execute against those orders pay a fee. Most futures exchanges charge trading fees and offer no rebates.

The maker-taker system is reversed on some markets to pay firms that trade against orders supplied by market makers or others who are charged a fee. That pricing, called taker-maker, in conjunction with the more popular structure may allow traders to be paid to supply orders on one market and get rebates when they trade against bids or offers elsewhere.

For more, click here.

Maughan Says Capital Requirement ‘Wall’ Curbs New Banks

Simon Maughan, head of sales and distribution at MF Global Ltd., discussed the Independent Commission on Banking’s proposed changes to the U.K. financial industry.

He talked from London with Andrea Catherwood and Elliott Gotkine on Bloomberg Television’s “Last Word.”

For the video, click here.

Erste’s Treichl Says Europe Should Enact Basel Uniformly

Erste Group Bank AG head Andreas Treichl said Europe should implement new rules by the Basel Committee on Banking Supervision in a uniform way and refrain from rules that differ from country to country.

“It’s not going to be a level playing field in Europe,” Treichl told European Union lawmakers in Brussels yesterday. “There are too many people and countries in Europe who are trying to improve it on their own,” he said. “Why don’t we just agree that we all accept Basel III as it is. It’s great and it’s going to make banking safer.” He added that it is a “dangerous path” to change bank capital rules without first resolving the European debt crisis.

Treichl, whose bank is the biggest in Austria and the second-biggest in eastern Europe, said he “just can’t accept” that the new Basel accord doesn’t help lending to companies “whose only mistake is that they are too small to get a rating.”

“While we increase the capital requirements for lending to the real economy, high-frequency trading has tripled over the last three years,” he said. “I’d love to have something that kills this stupid business tomorrow.”

Erste generates more than three-quarters of its revenue from retail clients and small and medium-sized companies.

Comings and Goings

EU Bank Recruiting Hurt by Global Bonus Rules, FSB Says

European Union banks face tougher pay and bonus rules than rivals in other countries, putting them at a competitive disadvantage in attracting talent, the Financial Stability Board said.

The U.S, Australia, Canada, Hong Kong and Japan have given banks “more flexibility” than the U.K. and other EU countries in applying international rules limiting bonuses, the FSB said yesterday following a review of global practices. National regulators should address the “level playing field” issues, the FSB said.

EU regulators approved laws to impose limits on cash payouts and on the size of bankers’ bonuses. Thirteen of the FSB’s member countries, including EU nations, have implemented the FSB pay guidelines, the FSB said. All but one of the standards have been adopted in the U.S, Switzerland and Australia. Argentina and South Africa are among countries that have made the least progress.

For more, click here.

--With assistance from Ben Moshinsky in London; Joshua Gallu, Meera Louis, Clea Benson, Gregory Mott, Joshua Zumbrun and Silla Brush in Washington; Boris Groendahl in Vienna; Michael J. Moore, Nina Mehta and David McLaughlin in New York; Margaret Cronin Fisk in Southfield, Michigan; Takahiko Hyuga in Tokyo; Eleni Himaras in Hong Kong; and Aaron Kirchfeld in Frankfurt. Editor: Stephen Farr

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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