Bloomberg News

Commodities ‘MF Rule,’ Shrinking Loans, Insurers: Compliance

December 07, 2011

(Updates with FSA “suspicious transaction” rule, Bank of England report, Capitol Hill Volcker Rule hearings in Compliance Policy; and Apple, e-book publisher probe in Compliance Action.)

Dec. 6 (Bloomberg) -- U.S. derivatives regulators approved restrictions on how brokers can invest customer funds, acting on a delayed rule after as much as $1.2 billion went missing before MF Global Holdings Ltd. sought bankruptcy protection.

The Commodity Futures Trading Commission voted 5-0 yesterday to limit how brokers invest clients’ margin in money market funds, and ban investments in foreign sovereign debt and in-house transactions such as repurchase agreements.

CFTC Commissioner Bart Chilton, one of three Democrats on the five-member panel, pushed for completion of the measure, which he dubbed the “MF rule.” CFTC Chairman Gary Gensler said the regulation is “critical for the safeguarding of customer money” by preventing in-house repurchase transactions.

Gensler said at the CFTC meeting in Washington that he believes there is “an inherent conflict of interest between parts of a firm doing these transactions.”

The rule approved yesterday will overturn a policy, instituted in 2005, that let brokers invest client funds in in- house transactions. It will ban such trades by brokers, who earn interest income by investing funds from segregated accounts, while allowing third-party deals, according to a CFTC summary.

Brokers will also be permitted to invest client funds in U.S. Treasuries, municipal debt, money-market funds and debt of Fannie Mae and Freddie Mac as long as the two housing finance companies are under the conservatorship of the Federal Housing Finance Agency, according to the summary.

The rule will take effect 60 days after its publication in the Federal Register. Brokers will then be required to comply within 180 days.

Gensler delayed the rule in July after being lobbied by brokers and their executives including Jon S. Corzine, the former New Jersey Governor then serving as MF Global’s chairman and chief executive officer.

For more, click here, and click here, and see Interviews section, below.

Compliance Policy

Basel Committee Plans to Discuss Curbs on Bank Borrowing

The Basel Committee on Banking Supervision will discuss the leverage ratio, a standard aimed at curbing excessive borrowing by lenders, when it meets next week, said Bill Coen, the group’s deputy secretary general.

Coen made the remarks at the RiskMinds conference in Geneva yesterday. The surcharge on systemically important financial institutions will also be a “significant issue,” he said.

Global regulators are split over the merits of a leverage ratio, which acts as a limit on banks’ indebtedness. While the measure is already applied in the U.S., the European Union hasn’t included it in proposals to boost the amount of capital the region’s lenders must hold.

The Basel committee presented draft plans for a leverage ratio last year with a view to the standard coming into force in 2018 after further study. The proposed limit would require a bank to have Tier 1 capital equivalent to 3 percent of its assets.

A spokeswoman for the committee declined to provide further details on the timing of next week’s meeting, which brings together bank regulators from 27 countries including the U.S., U.K. and China.

There needs to be greater harmonization of financial regulations, Jose Maria Roldan, director of banking regulation at the Bank of Spain and a member of the Basel committee, said in a separate presentation at the conference.

Banks Can’t Shrink Lending to Meet EU Targets, Enria Says

Regulators won’t allow lenders to cut lending to companies to circumvent tougher European Union capital requirements, the head of the region’s banking watchdog said.

The European Banking Authority is seeking to ensure that lenders bolster their capital by raising fresh reserves, rather than by threatening the economy by running down loans, the agency’s Chairman Andrea Enria said in Brussels yesterday.

European policy makers are trying to avoid triggering a credit crunch and recession with their plans to force banks to boost capital. One way for banks to increase their capital ratios is for them to shrink their balance sheets by cutting lending. Banks are likely to reduce their balance sheets by as much as 2.5 trillion euros ($3.4 trillion) within the next 18 months, Morgan Stanley analysts said in a report last month.

European leaders are demanding the region’s banks increase their capital after financial firms agreed to accept losses on Greek government bonds. Enria, who described lenders’ shrinkage in lending, was speaking ahead of the EBA’s release of updated figures on how much capital lenders should raise to absorb losses from euro-area bonds.

For more, click here.

Separately, Enria said that EU plans to write down unsecured creditors at failing banks should exempt debt issued before a cutoff date. This is needed to prevent the proposals “exacerbating” difficulties that lenders are facing in getting funding, he said in Brussels yesterday.

Finance Firms Must Report Rivals’ Suspicious Trades, FSA Says

Finance firms that don’t report a suspicious transaction at a rival, even if they don’t have proof of wrongdoing, may face a fine, a lawyer at the U.K. finance regulator said.

Banks and financial institutions in the U.K. aren’t doing enough to report suspected market abuse, Jamie Symington, the head of the wholesale group in the Financial Services Authority’s enforcement division, said in a speech in London.

The regulator has “invested heavily” in enhancing its surveillance capabilities and will complete a revamp of its database of market transactions next year, Symington said. Last month, the FSA enacted rules to ensure that mobile telephone conversations involving traders were recorded for use in possible market-abuse probes.

The Financial Conduct Authority, which will take over the FSA’s enforcement role in 2013 as part of a government restructuring of U.K. financial regulation, will continue the FSA’s strategy of credible deterrence, Symington said.

BOE Says Capital-Raising Needs Outweigh Risks of Tapping Market

The Bank of England’s Financial Policy Committee said the need for banks to raise capital to strengthen the resilience of the financial system outweighs the risks associated with entering a “stressed market.”

The FPC, which first made the comments in the record of its Nov. 23 quarterly meeting, recommended that banks “give serious consideration” to raising external capital. The committee “recognized that there were risks associated with attempting to raise fresh external capital in a stressed market environment,” it said today in the report in London. “These concerns were outweighed by the potential benefits of raising additional capital to the resilience of the system as a whole.”

Bank of England Governor Mervyn King urged banks last week to enhance efforts to bolster their defenses against the euro area’s debt turmoil, which now looks like a “systemic crisis.” The FPC recommended the Financial Services Authority encourage banks to disclose leverage ratios to investors by the start of 2013, and said that if banks’ earnings aren’t enough to build capital, they should limit payments of bonuses and dividends.

In today’s record of the meeting, the FPC said that dividend policy “should be used actively” and it saw a “strong case for limiting distributions to staff, although this might not be costless.”

Regulators Face Grilling by Congress on Volcker Rule, Dodd-Frank

Regulators implementing the Dodd-Frank Act face questions from U.S. lawmakers today over progress on required new rules, including provisions of a proposal to bar Wall Street firms from proprietary trading.

The Treasury Department, Federal Reserve and other financial regulators have spent more than a year drafting rules required by the law, which also includes new regulations for the $708 trillion global swaps market, tools to wind down failing financial firms and enhanced supervisory powers over the largest and most interconnected companies.

Regulators are working on hundreds of rules required by the law. Some agencies are struggling to meet deadlines or postponing rulemakings until 2012 amid budget cuts and strained resources.

Securities and Exchange Commission Chairman Mary Schapiro argued that her agency won’t be able to do its job without a bigger budget in 2012.

A draft of the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, released by regulators in October has drawn criticism from both Democratic and Republican lawmakers as well as banks. Some say it is too complex and lacks clarity, others that it is either too tough or too easy on Wall Street.

For more, click here.

Compliance Action

Insurers Pay $53 Million in Death Benefits After New York Probe

Life insurers paid $52.6 million in death benefits after New York’s banking and insurance regulator forced the companies to use government data to identify cases where they hadn’t paid claims.

Almost 8,000 beneficiaries received the money, according to a statement yesterday from the New York Department of Financial Services. Claims are being processed on an additional 27,889 polices for which matches were found. About 1 million policies need further checking as a result of the department’s probe, according to the statement.

Insurers have faced increased scrutiny from regulators in Florida, California and other states over unpaid death benefits. MetLife Inc., the largest U.S. life insurer, took a $117 million charge in the third quarter related to unpaid death benefits, while American International Group Inc. added about $100 million to reserves in the second quarter after changing its process for determining when policyholders die.

The regulator said in July it was directing the 172 life insurers and fraternal benefit societies licensed in the state to use U.S. Social Security Administration death records or other data to identify deceased policyholders. Insurers must provide interest on delayed payments, the department said. Data were released yesterday as part of the regulator’s first interim report on the benefits.

Apple, E-Book Publishers Probed by European Union Regulator

Apple Inc., the world’s biggest technology company, and five e-book publishers are being investigated by European Union antitrust regulators over deals that may restrict sales across the region.

The European Commission in Brussels today said it opened a formal probe to examine whether the publishing groups and Apple, maker of the iPad tablet computer, engaged in agreements that would harm competition in the 27-nation EU. The probe will examine deals between Apple and Lagardere’s Hachette Livre, News Corp.’s Harper Collins, CBS Corp.’s Simon & Schuster, Pearson Plc’s Penguin and Verlagsgruppe Georg von Holtzbrinck GmbH.

“The commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices,” the EU said in a statement.

EU regulators raided e-book publishers in March as part of the investigation. Amazon.com Inc., the world’s largest Internet retailer, may sell as many as 5 million e-book readers in the fourth quarter, according to a report from Forrester Research Inc.

Britain’s Office of Fair Trading, which opened an investigation in February, said in a statement on its website today that it would drop its probe into e-books to allow EU officials to take the lead.

“Pearson does not believe it has breached any laws, and will continue to fully and openly cooperate with the commission,” the company said in an e-mailed statement.

Apple, Lagardere, CBS and its Simon & Schuster unit and Harper Collins didn’t immediately respond to calls and e-mails seeking comment. Holtzbrinck didn’t immediately respond to an e- mail seeking comment.

Courts

Deutsche Bank Sued for Billions Over Fund’s Currency Losses

Deutsche Bank AG faces a claim that may be worth billions of dollars in a lawsuit with investment fund Sebastian Holdings Inc. over failed foreign exchange transactions.

Sebastian said in court papers in London that Germany’s largest bank allowed a trader to breach currency-trading limits between 2006 and 2008. Sebastian, owned and run by Norwegian investor Alexander Vik, said it suffered losses and missed out on profits worth about $2.5 billion when it had to meet margin calls and close out positions because of the dispute.

Deutsche Bank said in an e-mailed statement that it will “vigorously” defend against the claims, which it noted date to 2008.

Deutsche Bank is pursuing Sebastian in the U.K. courts for $245 million in unpaid margin calls from the period. Sebastian has filed a “substantial” counterclaim valued at several billion dollars, its lawyer, Tim Lord, said at a pretrial hearing in London on Nov. 21.

The dispute relates to “exotic derivatives” and the breakdown of prime brokerage services provided by Deutsche Bank, Lord said in November. Sebastian was seeking additional documents from Deutsche Bank’s Swiss unit ahead of a trial in London.

The case is: Deutsche Bank AG v. Sebastian Holdings Inc, 09-83, High Court of Justice, Queen’s Bench Division, Commercial Court

Raj Rajaratnam Begins 11-Year Sentence In Federal Prison

Raj Rajaratnam, the co-founder of Galleon Group LLC convicted of insider trading, was set to report yesterday to a federal prison in Ayer, Massachusetts, according to a person familiar with his assignment.

Rajaratnam was expected to be fingerprinted, photographed, strip-searched and issued a number to serve as his identity at the federal prison.

Though his prison could be changed at the last minute, the convicted co-founder of Galleon Group LLC -- two former inmates and an ex-U.S. prison official agreed -- faces very hard time.

Rajaratnam, 54, was sentenced in October after a federal jury in Manhattan found him guilty of 14 counts of securities fraud and conspiracy. He directed colleagues, consultants and corporate officers to leak information that made him tens of millions of dollars.

His was the longest sentence ever handed down for such a crime, and the culmination of a four-year nationwide probe of insider trading. Last week, a three-judge panel rejected his last-minute plea to remain free while he appeals his conviction.

The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Ex-Mishcon Partner Convicted in $29 Million Loan Fraud, SFO Says

A former partner at the London law firm Mishcon de Reya was convicted of fraud and forgery to get a 22 million-euro ($29.6 million) bank loan from a unit of Zurich-based EFG International AG.

Kevin Steele, 51, was found guilty yesterday at a London criminal court of helping to obtain a loan in 2008 by stating there was 76 million pounds ($119 million) on deposit at Bank Julius Baer in Guernsey that could be used as security for the loan, the Serious Fraud Office, which prosecuted the case, said in a statement yesterday.

Two other defendants in the case pleaded guilty before trial. The three men will be sentenced Jan. 9, the SFO said.

Interviews/Speeches

Atkins Says Corzine Needs to Address MF Funds Issue

Paul Atkins, managing director of Patomak Partners and a former commissioner at the U.S. Securities and Exchange Commission, talked about the collapse of MF Global Holdings Ltd. and a vote yesterday by the Commodity Futures Trading Commission to restrict how brokers can invest customer funds.

Atkins spoke on Bloomberg Television’s “InBusiness With Margaret Brennan.”

For the video, click here.

--With assistance from Noah Buhayar and Bob Van Voris in New York; Erik Larson, Lindsay Fortado, Kit Chellel, Jennifer Ryan and Schuyler Clemente in London; Jim Brunsden and Aoife White in Brussels; Giles Broom in Geneva; and Phil Mattingly and Silla Brush 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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