Bloomberg News

Examining Muni-Bonds, Credit Raters, MF Global: Compliance

November 02, 2011

(Updates with ex-State Street Executives in Courts; and MF Global Special Section in Compliance Action.)

Nov. 1 (Bloomberg) -- U.S. financial regulators are examining the rising use of loans to state and local governments that allow public officials to take on added debt without disclosing it to municipal-bond investors.

Officials with the Municipal Securities Rulemaking Board, which writes regulations for the $2.9 trillion tax-exempt bond market, have discussed the issue with the Securities and Exchange Commission, Alan Polsky, chairman of the MSRB, said on a conference call with reporters yesterday. Polsky said the board and the agency are concerned about bank loans.

Standard & Poor’s in July estimated that municipalities may borrow as much as $75 billion from banks this year, while Fitch Ratings has also said localities should disclose information about such direct deals with banks. The MSRB, based in Alexandria, Virginia, said in August that loans could fall under some securities rules. It is urging the SEC to weigh in on the matter.

The loans may leave investors unaware about rising debt obligations that could affect their credit ratings, Polsky said.

Compliance Policy

CFTC Approves Private-Fund Risk Reporting in Joint Rule With SEC

The Commodity Futures Trading Commission approved a final rule requiring certain advisers to private funds dually registered with the Securities and Exchange Commission to report information for use by the Financial Stability Oversight Council in monitoring risks to the U.S. financial system.

The CFTC announced its approval of the rule, passed by the SEC on Oct. 26, in a statement yesterday.

G-20 to Focus on 29 Biggest Banks, German Official Says

Global regulators will call for capital surcharges on 29 of the biggest banks to reduce risks to the financial system, a German government official said.

The list of so-called systemically relevant banks affected by the rules will be published at the end of the Group of 20 summit in France this week, the official told reporters in Berlin yesterday on condition of anonymity because the negotiations are private. He declined to reveal the banks’ names.

G-20 governments had previously considered naming as many as 50 banks as systemically important to the global economy and in need of extra capital, two officials from member nations said Oct. 16. Regulators have clashed with some institutions over the additional capital rules.

Leaders of the G-20 will discuss improved supervision and ways to ensure that such banks can be restructured or wound down without causing shocks to the financial system, the German official said. Regulators will designate systemically relevant insurers later, he said.

The goal is to phase in the surcharges, drafted by the Basel Committee on Banking Supervision, in 2016 and reach the new capital levels by 2019, according to the official. The additional capital buffer requirement will range from 1 percentage point to 2.5 percentage points on top of expanded core capital requirements set by the Basel group last year.

For more, click here, and click here.

Compliance Action

Credit-Rating Firms to Be Supervised by EU Markets Regulator

The three main credit-ratings companies face direct supervision from a single European Union market regulator for the first time, after registering with the European Securities and Markets Authority.

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings could face on-site inspections from ESMA to assess how well they comply with rules on “governance, conflicts of interest and transparency,” the agency said in an e-mailed statement.

Steven Maijoor, ESMA chairman, said in an e-mailed statement yesterday that the supervision will “contribute” to the quality of ratings and keep markets functioning well.

The European Commission, the EU’s executive arm, proposed that credit-ratings companies should be directly regulated by ESMA in May last year. Scrutiny of the firms, which analyze debt-default risk, intensified after Greece’s rating was cut to junk status by Standard & Poor’s in 2010.

“Our registration reflects the robust standards, policies and processes that S&P has put in place worldwide,” Martin Winn, a spokesman for S&P, said in an e-mailed comment.

ESMA also gave non-EU rating companies that issue reports on corporate and sovereign debt in Europe an extension until Jan. 31, to a deadline requiring them to comply with the rules.

Nigeria Seeks Emerging-Index Addition to Increase Volumes

Nigeria is aiming for inclusion into emerging-market indexes by introducing measures and new listings to increase trading volumes, U.S. Securities and Exchange Commission Director General Arunma Oteh said.

The regulator and the Nigerian Stock Exchange plan talks next year with index providers such as Morgan Stanley and JPMorgan Chase & Co., Oteh said in an Oct. 28 interview in her office in Abuja, the capital. Sub-Saharan Africa’s second- biggest economy will increase market depth to boost its prospects of inclusion by introducing securities lending, short- selling and changes to market-making rules, she said.

The SEC approved securities lending and short selling and the exchange is working on introducing them, Oteh said. The regulator expects the exchange to submit new rules by year-end to encourage market-making, she said. The bourse aims to introduce its first exchange-traded fund next year as well as options and financial futures within five years, Nigerian Stock Exchange Chief Executive Office Oscar Onyema said yesterday at a conference in Abuja.

The Nigerian Stock Exchange, whose index is sub-Saharan Africa’s second-worst performer this year after Kenya, is targeting a market value of $1 trillion by 2016.

For more, click here.

Argentina Creates Approval System for Foreign Exchange Purchases

Argentina created an online verification system for individuals seeking to purchase foreign exchange that takes effect yesterday, according to a statement in the Official Gazette.

All foreign exchange transactions must be checked online to ensure that the individual making the purchase has the financial means to do so, yesterday’s statement said. The program is intended to aid in the fight against money laundering, the statement said.

OCBC Reprimanded for Failure of Its Online, Branch Systems

Oversea-Chinese Banking Corp. was reprimanded by the Monetary Authority of Singapore for the failure of its automated-teller machine, Internet and credit card banking networks on Sept. 13.

The regulator directed the bank to review its network, its monitoring systems and all supporting vendors, according to an e-mailed statement yesterday.

Italian Lenders Penalized by EBA Capital Rules, Guzzetti Says

Italian banks are penalized by European Banking Authority capital requirements that reflect the interests of France and Germany, according to Giuseppe Guzzetti, head of Italy’s national banking foundations’ group.

Italian banks “are not responsible for the financial disorders” of the last few years and didn’t receive state aid like some of their peers in France and Germany, Guzzetti said yesterday in a speech in Rome.

Italy’s non-profit foundations hold stakes in the country’s biggest lenders. Guzzetti is chairman of the Cariplo banking foundation, one of the largest shareholders in Intesa Sanpaolo SpA, Italy’s second-biggest lender.

Italy’s top five lenders have to boost capital by 14.8 billion euros ($20.6 billion), the third-highest amount after Greece and Spain, to meet an EBA requirement for banks to hold 9 percent in core capital after sovereign-debt writedowns by the middle of next year. French banks require 8.8 billion euros of capital and German lenders 5.2 billion euros.

SEC Judge Clears Two Ex-State Street Executives of Civil Fraud

The chief administrative law judge at the U.S. Securities and Exchange Commission dismissed the case against two former executives of State Street Bank & Trust Co.

Judge Brenda Murray in a written decision Oct. 28 dismissed charges against John Flannery and James Hopkins. The two had been charged with civil fraud in connection with subprime mortgage investments in 2007.

“I find that neither Flannery nor Hopkins was responsible for, or had ultimate authority over, allegedly false and materially misleading documents,” Murray wrote.

Boston-based State Street agreed to repay investors about $300 million in February 2010 to settle charges by the SEC and Massachusetts regulators related to the bond fund. State Street also has paid around $340 million to investors to settle private lawsuits, according to a report of the dismissal yesterday by the Associated Press.

The case is In the Matter of John P. Flannery and James D. Hopkins, Before the U.S. Securities and Exchange Commission, 3-14081 (Oct. 28, 2011).

Special Section: MF Global

MF Global Probe Said to Involve Hundreds of Millions in Funds

U.S. regulators are investigating whether hundreds of millions of dollars are missing from client accounts at MF Global Holdings Ltd., according to two people with knowledge of the matter.

The firm, which filed for bankruptcy protection yesterday, was ordered by the enforcement division of the Commodity Futures Trading Commission to preserve records for the review, one of the people said.

MF Global, the holding company for the broker-dealer run by former New Jersey governor and ex-Goldman Sachs Group Inc. co- Chairman Jon Corzine, told regulators yesterday about deficiencies in accounts that it managed for clients in the futures market, the CFTC and Securities and Exchange Commission said in an e-mailed statement.

Corzine, 64, now faces a regulatory probe as well as a bankruptcy. He wagered $6.3 billion of the firm’s own money on sovereign European debt in a bid to increase profits. Instead, the firm reported a $191.6 million quarterly loss on Oct. 25 as Europe’s debt crisis led to demands from regulators to boost capital, as well as credit downgrades and margin calls, MF Global President Bradley Abelow said.

Under CFTC regulations, futures brokers that trade on exchanges are required to keep their clients’ collateral, often cash or securities, separate from their own accounts. The segregated collateral is meant to reduce risk in futures trades. MF Global had almost $7.3 billion in customer funds in segregated accounts as of Aug. 31, according to the most recent CFTC data.

According to a joint e-mailed statement from regulators, they have been “closely monitoring” developments at MF Global Inc. for several days “in anticipation of a transaction that would include the transfer of customer accounts to another firm.”

“Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm,” the regulators said yesterday in the e-mail.

The regulators said they determined that a bankruptcy proceeding “would be the safest and most prudent course of action to protect customer accounts.”

Diana DeSocio, an MF Global spokeswoman in New York, didn’t immediately reply to a phone call and an e-mail from Bloomberg News requesting comment.

MF Global Holdings, the holding company for the broker- dealer run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy protection yesterday. Its broker- dealer unit, MF Global Inc., faces liquidation.

For more, click here, click here.

Separately, Nasdaq OMX Stockholm AB declared MF Global UK Ltd. in default under the exchange’s clearing rules for commodity derivatives.

The Swedish exchange, in an e-mailed statement, cited as a reason a notice from the U.K. Financial Services Authority that MF Global UK Ltd. was placed under a special administration regime.

The company entered the special administration regime, with KPMG LLP’s Richard Fleming, Richard Heis and Mike Pink being named joint special administrators, the Financial Services Authority said in a statement yesterday.

Interviews/Speeches

Barofsky Says Wall Street Will Work Around Volcker Rule

Neil Barofsky, former special inspector general for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, talked about the implementation of the Volcker rule and its impact on financial firms.

Barofsky, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack,” also discussed the outlook for MF Global Holdings Ltd.

For the video, click here.

Bove, Levitt Comment on MF Global; More Oversight Expected

Richard Bove, bank analyst at Rochdale Securities LLC, said the potential failure of MF Global Holdings Ltd. will result in more oversight by the Federal Reserve. Former Securities and Exchange Commission Chairman Arthur Levitt, who advises Goldman Sachs Group Inc., said MF Global’s Jon Corzine “was a risk taker.”

MF Global, the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co- chairman Jon Corzine, filed for bankruptcy yesterday after making bets on European sovereign debt.

Bove talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the Bove audio, click here.

Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the Levitt audio, click here.

Greenberg Says Investment Banking Still Great Business

Alan “Ace” Greenberg, vice chairman emeritus at JPMorgan Chase & Co. and former chairman and chief executive officer of Bear Stearns Cos., talked about high-frequency trades, the banking industry, financial markets and leadership, among other topics.

He spoke with Bloomberg’s Stephanie Ruhle in New York on Oct. 27.

For the video, click here.

--With assistance from Silla Brush, William Selway and Gregory Mott in Washington; Ben Moshinsky in London; Chiara Vasarri in Rome; Chris Kay in Abuja, Nigeria; Lars Klemming in Singapore; Tony Czuczka in Berlin; Stephen Voss and Edward Evans in London; and Bill Faries in Buenos Aires. Editor: Glenn Holdcraft

MS US<Equity> CN JPM US <Equity> CN GS US <Equity> CN MF US <Equity> CN 3204326Z US <EQUITY> CN 2019103Z LN <EQUITY> CN ISP IM <Equity> CN 9933Z US <Equity> CN OCBC SP <Equity> CN 3899Z US <Equity> CN 4062709Z LN <Equity> CN 8130619Z US <Equity> CN

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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