Bloomberg News

Order Flow Conflicts, Retail Liquidity, Bananas: Compliance

October 13, 2011

(Updates with Northumbrian Water in Compliance Action; Commerzbank in Courts; Hintz, Burns in Interviews/Speeches; and

By Carla Main

Oct. 13 (Bloomberg) -- The U.K.’s Financial Services Authority proposed that brokers that receive payments from market-makers in return for orders be forced to prove to clients that the deal didn’t damage their trade.

The practice, known as payment for order flow, may “lead to client detriment through breaches of our conflicts of interest, inducements and best execution rules,” according to a report on the FSA’s website yesterday. Brokers would be banned from accepting payments unless they can prove it doesn’t hurt customers.

The European Commission, the 27-nation European Union’s executive arm, is scheduled to propose this month an overhaul of trading rules for financial markets following the 2008 contraction in the credit markets that followed the collapse of Lehman Brothers Holdings Inc.

Compliance Policy

NYSE Seeks SEC Approval for Plan to Win More Retail Orders

NYSE Euronext proposed creating a new class of traders at the New York Stock Exchange that may help it win more business from firms that handle orders from individual investors.

The New York-based company filed for Securities and Exchange Commission permission to begin a pilot program for what it called retail liquidity providers. It would let trading firms say certain bids and offers are for small investors, so long as the prices are better than what is publicly available. Quotes from the firms wouldn’t be visible to everyone.

NYSE Euronext wants more retail orders because they are usually more profitable than transactions from professional investors, according to James Angel, a finance professor at Georgetown University in Washington. The exchange made the announcement following a drop in its share of trading in companies it lists to 26 percent last month from 82 percent in 2003, data compiled by Barclays Plc and NYSE Euronext show.

Most orders from individual investors who trade through retail brokers are sent to wholesalers. NYSE Euronext’s plan would provide an incentive to retail brokers to send orders directly to the exchange, which may dissuade them from selling orders to wholesalers. As more retail orders come in, the institutional investors who trade on the exchange would see more retail orders, attracting more business to NYSE Euronext.

Volcker Rule Gaps May Leave Banks Uncertain About Trading Bans

More than a year after they began crafting the Dodd-Frank Act’s ban on proprietary trading by U.S. banks, regulators published the so-called Volcker rule while acknowledging that hundreds of questions remain unanswered.

The proposed rule, written by four regulatory agencies and issued for public comment Oct. 11, would ban banks from trading for their own accounts. Banks would be allowed to make short- term trades for hedging or market-making while facing limits on investments in hedge funds and private equity funds.

Within the rule’s 298 pages, regulators seek feedback instead of offering precise definitions for many of the banned activities, which may leave financial firms unsure about how to prepare for the final adoption of the rule next year.

In their proposal, regulators said it was difficult to define permitted activities. Still, regulators will have to make the language more precise before a final rule goes into effect July 21, 2012, because the proposal includes substantial compliance requirements for banks, said Thomas Pax, head of the bank regulatory practice at the Clifford Chance LLP law firm in New York.

The board of the FDIC voted 3-0 Oct. 11 to seek comments on the proposal through January 13. The Fed also said it would accept feedback through that date.

For more, click here.

EU Seeks Higher Bank Capital, Greek Payout in Crisis Fight

European Commission President Jose Barroso called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to master Europe’s debt woes.

Barroso urged a “coordinated approach” to deliver a “significantly higher capital ratio of highest quality capital” for banks, while offering government funds only as a last resort. Banks that require aid would be barred from paying dividends or bonuses. Barroso made the remarks yesterday to the European Parliament in Brussels.

Banks face capital requirements as high as 9 percent as part of Barroso’s plans to help lenders survive the region’s debt woes, according to a person familiar with the proposals.

The Association of German Banks said Barroso’s proposal to increase banks’ capital is “unsuitable” as it doesn’t solve the problem of the current debt crisis.

An Oct. 23 summit of euro leaders looms as a deadline for a breakthrough in combating the crisis, which has driven Greece toward default, rattled world markets and dented confidence in the survival of the 17-nation currency.

For more, click here and click here.

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

House Lawmakers to Propose Repeal of Durbin Swipe-Fee Rule

Two U.S. House lawmakers say they will introduce a bill to repeal a Federal Reserve rule capping debit-card swipe fees.

Representatives Jason Chaffetz, a Utah Republican, and Bill Owens, a New York Democrat, were expected to introduce a measure yesterday to repeal the rule required by the 2010 Dodd-Frank Act. The Fed on Oct. 1 implemented the rule, which limits fees that card networks charge merchants to 21 cents per transaction --about half the average retailers have paid in the past.

The repeal legislation “fixes the disastrous consequences of this bill,” Chaffetz said yesterday in a statement. “Congress must repeal this egregious provision that increases the costs of doing business on everyone.”

The caps may cut as much as $8 billion in revenue from the largest U.S. banks, according to data compiled by Bloomberg Government. In response, Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and SunTrust Banks Inc. have been rolling out new charges for debit-card users.

Payment networks like Visa Inc. are forecasting slower growth under the new rules, which give retailers a choice of at least two unaffiliated networks when they process transactions. That change may create more competition for the networks, which had been able to negotiate exclusive deals.

SEC Proposes Registration Rules for Swap Dealers, Participants

The U.S. Securities and Exchange Commission voted to seek comment on a proposed registration process for security-based swap dealers and major swap participants.

SEC commissioners voted 3-1 yesterday at a meeting in Washington to approve the registration process, part of the agency’s rulemaking under the Dodd-Frank Act.

Compliance Action

Pacific Fruit Fined $12.3 Million by EU Over Banana Cartel

Firma Leon Van Parys NV’s Pacific Fruit unit was fined 8.9 million euros ($12.3 million) for fixing banana prices in an antitrust case brought to the European Union’s attention by Chiquita Brands International Inc.

Chiquita, the world’s biggest banana producer, wasn’t punished because it was first to tell regulators about price- fixing in Italy, Greece and Portugal from July 2004 to April 2005, the European Commission said in an e-mailed statement.

Chiquita, based in Cincinnati, avoided EU fines for blowing the whistle in a similar case in 2008.

Pacific Fruit, based in Antwerp, Belgium, and owned by Firma Leon Van Parys, declined to comment. It imports bananas to Europe using the brand name Bonita. Chiquita is “pleased to have this issue concluded,” Ed Loyd, a spokesman for Chiquita, said in an e-mailed statement.

Obama Consumer Watchdog Said to Have Known About BofA Fee

The Obama administration’s new consumer watchdog knew about Bank of America Corp.’s plan to impose a $5 monthly debit-card fee at least two weeks before the firm’s announcement ignited a public firestorm, said people briefed on the discussions.

The lender met with Consumer Financial Protection Bureau officials on Sept. 16 to inform them of the fee, Susan Faulkner, head of consumer banking products, told employees Oct. 11 at a gathering in Delaware, said two people who attended. They asked for anonymity because the event was private. Faulkner said the regulator didn’t oppose the fee, according to one of the people.

Bank of America set off a backlash last month when it announced plans to charge some customers for using debit cards, with President Barack Obama among the lead critics. He reprimanded the Charlotte, North Carolina-based firm on Oct. 3, saying that banks didn’t have an “inherent right” to profits and that the added fees are “exactly why we need somebody whose sole job it is to prevent this kind of stuff from happening.”

Obama later said that while banks have the right to impose the fee, it wasn’t fair to consumers.

Bank of America, the biggest U.S. lender by assets as of midyear, went ahead with the fee after competitors imposed similar charges, David Darnell, the bank’s co-chief operating officer, said at the Oct. 11 gathering, according to the people.

The Consumer Bureau didn’t “bless this or any other fee,” said Jennifer Howard, a spokeswoman for the regulator. “That simply isn’t our role. Nor is it our role to advise banks on whether the public would readily accept a new fee.”

The consumer bureau officially started operating in July.

For more, click here.

Northumbrian Water Group Shares Temporarily Suspended

U.K. Financial Services Authority temporarily suspends Northumbrian Water Group Plc at the request of the company pending an announcement.

The suspension became effective at five o’clock in the evening on Oct. 10, according to the authority’s statement.

Magna Says It Will Cooperate With U.S. Antitrust Investigation

Magna International Inc., North America’s largest auto- parts supplier, said it would cooperate with the U.S. Department of Justice’s antitrust investigation into the automobile tooling industry.

Magna, based in Aurora, Ontario, has been asked to hand over documents for bids including a tooling program by a subsidiary of its Cosma International unit, the company said in a statement distributed by PRNewswire.

“We are fully cooperating with the DOJ,” the company said.

Magna designs and manufactures car systems and parts, and assembles vehicles.

Courts

Standard Life Sues Insurers Over U.K. Pension Fund’s Losses

Standard Life Plc sued insurers including ACE European Group Ltd. for 100 million pounds ($157 million) claiming its policy should have covered a loss on asset-backed securities triggered by the collapse of Lehman Brothers Holdings Inc.

Standard Life, which is based in Edinburgh and manages about 157 billion pounds, was forced to inject 100 million pounds into its Standard Life Pension Sterling Fund in 2009 during the credit-market contraction that followed Lehman’s 2008 failure, according to documents filed at a London court. Because the fund was marketed as a low-risk, cash-based investment, the losses led to hundreds of complaints and media criticism.

Standard Life is suing ACE European Group, a London-based affiliate of ACE Ltd., and 10 other firms that provided professional indemnity insurance which it said should cover the costs.

Clair Whitefield, a spokeswoman for ACE, declined to comment on the litigation.

Commerzbank Wins Dismissal of 13 Cases Over Dresdner Bonus Cuts

Commerzbank AG, Germany’s second-biggest bank, won dismissal of 13 cases filed by former Dresdner Kleinwort investment bank employees over 2008 bonuses at the country’s top labor court.

The Federal Labor Court in Erfurt said the bank had the right to cut the bonuses by 90 percent after Dresdner Kleinwort suffered more than 6 billion euros ($8.2 billion) in losses during the financial crisis. The court ruled against the bank in three separate cases that it said were covered by labor agreements.

Commerzbank was forced to tap Germany for 18.2 billion euros of capital during the credit crisis and cut 2008 bonuses for Dresdner employees from a 400 million-euro pool by as much as 90 percent. The reductions led to dozens of lawsuits in Germany and London.

Three cases brought by former Dresdner employees were granted by the top judges because they were covered by an agreement brokered by the lender’s works council. Under those rules, bonuses on average reached one to two monthly payments. The 2008 were reduced to 1,000 euros which was contrary to the agreement, the judges said.

Interviews/Speeches

Hintz Says Volcker Rule Concern for Fixed-Income Desks

Brad Hintz, an analyst at Sanford C. Bernstein & Co., talked about the so-called Volcker rule that would bar banks from making short-term trades for their own accounts and limit their ownership of private-equity and hedge funds.

The U.S. Securities and Exchange Commission Oct. 11 joined three other federal regulators in seeking comment on the rule. Hintz, who spoke with Lisa Murphy and Adam Johnson on Bloomberg Television’s “Street Smart,” also discussed the performance of Federal Reserve Chairman Ben S. Bernanke and bank stocks.

For the video, click here.

For more Rajaratnam sentencing, click here, and click here.

Burns Says Rajaratnam May Get 14 or 15 Year Sentence

Douglas Burns, a formal federal prosecutor, talks about Galleon Group LLC co-founder Raj Rajaratnam’s sentencing today for masterminding the biggest hedge-fund insider trading scheme in U.S. history.

Burns speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”

For the video, click here.

Comings and Goings

Wayne Byres to Be Secretary General of Basel Committee

Wayne Byres, an official at the Reserve Bank of Australia, will become the next secretary general at the Basel Committee on Banking Supervision, the Bank of International Settlements said in a statement.

Byres supervises “large, complex banks” in the Australian Prudential Regulatory Authority, according to a statement on the Basel Committee’s website. He has held that position for seven years, the Basel Committee said its statement.

--With assistance from Anthony Aarons, Ben Moshinsky and Kit Chellel in London; James G. Neuger and Aoife White in Brussels; Hugh Son, James Sterngold, Whitney Kisling and Nina Mehta in New York; Karin Matussek in Berlin; and Clea Benson, Meera Louis, Gregory Mott, Louisa Fahy and Phil Mattingly in Washington. 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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