Bloomberg News

Japan M&A, Bank Examiner ‘Secrets,’ Dark Pools: Compliance

December 20, 2011

(Updates with derivatives-collateral survey paper, U.K. mortgage rules in Compliance Policy; and FSA-fines study, Brussels Airlines-TAP SGPS antitrust raid in Compliance Action.)

Dec. 19 (Bloomberg) -- Japan’s Financial Services Agency is seeking tougher rules governing the disclosure of information on takeovers to avoid a repeat of the Olympus Corp. accounting scandal, said Shozaburo Jimi, head of the regulator.

The agency is studying amendments to securities law and will work with the nation’s stock exchanges to require companies to disclose more data on mergers and acquisitions, Financial Services Minister Jimi said at a news briefing in Tokyo Dec. 16.

Officials are trying to improve corporate governance in Japan after Olympus admitted to a 13-year cover-up of investment losses. Tokyo-based Olympus, the world’s biggest maker of endoscopes, inflated fees for advisers and overpaid for companies it bought with the intention of hiding losses.

The FSA will also consider measures to “correct and prevent” collaboration by money brokers in cover-ups, as well as improve auditing procedures, he said.

Former Olympus Chief Executive Officer Michael Woodford, the whistle-blower who questioned fees paid by the camera maker, was fired as president and CEO in October after he confronted the company’s board about oversized payments made to advisers in the acquisition of Gyrus Group Plc in 2008.

Compliance Policy

Bank Examiners Make Secret Suggestions During Reviews

At least 1,400 times last year, federal examiners told a bank to fix a problem that could imperil its health, according to data from the three agencies that regulate banks. The agencies didn’t reveal the names of the troubled banks or the nature and severity of their concerns. That information is kept from investors, customers and the public unless securities laws force the bank itself to disclose.

Such secrecy is needed to prevent panic that might result in bank runs or investor sell-offs, making problems far worse, said representatives of the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., all of which regulate banks and financial institutions.

Informal regulatory approaches, such as suggestions made by bank examiners to compliance officers, also mean the public can’t see when regulators do a poor job, said Viral Acharya, an author of several books on financial regulation who teaches at New York University’s Stern School of Business. He added that the regulators “should be accountable.”

Examiners weren’t always as tough as they needed to be from 2006 through the third quarter of 2010, according to a June report by the Government Accountability Office, an investigative arm of Congress.

For more, click here.

France Urges Tougher Rules on High-Frequency Trades, Dark Pools

France’s financial market regulator urged the European Union to toughen its planned overhaul of rules, highlighting the need for more oversight of high-frequency trading and new trading platforms.

Thierry Francq, secretary general of the Autorite des Marches Financiers, said at the regulator’s Paris headquarters Dec. 16 that proposals presented in October by the EU are “insufficient” in ways that “could have grave consequences.”

“It’s absolutely essential that we move towards a system of centralized surveillance of orders and transactions on the markets,” the AMF said in a statement of its priorities for the overhaul, seeking a “more ambitious” plan for markets oversight.

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 Securities and Markets Authority needs to have greater control of the high-frequency trading fees structure, according to Francq.

Chilton Says Brokers Should Put Client Funds Only in U.S. Debt

The Commodity Futures Trading Commission should ban derivatives brokers from investing client funds in anything other than U.S. debt, commissioner Bart Chilton said.

Chilton said recent changes in regulations governing client funds, approved after MF Global Holdings Ltd. filed for bankruptcy, don’t provide enough protection for clients.

Steps need to be taken to put “confidence and trust back into our U.S. derivatives markets,” Chilton, a Democrat, said in a statement.

MF Global filed for bankruptcy on Oct. 31. James W. Giddens, the trustee overseeing the liquidation of the company’s brokerage, has estimated that as much as $1.2 billion in client funds may be missing.

Traders Buying EIB CO2 May Have Privileged Data, IETA Says

Companies buying 2013 European Union carbon permits directly from the European Investment Bank may have “privileged” information that other traders don’t have, according to an emissions-trading lobby group.

The lack of public information about the commencement of the sales means that “if you are a recipient of a large volume you are in a privileged position,” said Simone Ruiz, Brussels- based European policy director at the International Emissions Trading Association. She spoke by telephone Dec. 16.

The EIB may have last week begun selling privately the first tranche of 200 million EU permits for the third phase of the EU’s emissions trading system, which begins in 2013, to fund renewable energy and carbon capture projects as part of the EU’s drive toward a low-carbon economy. The permits are worth as much as 1.5 billion euros ($2 billion).

Nick Antonovics, a spokesman for the Luxembourg-based EIB, declined to comment on criticism of the sales process when reached Dec. 16 by phone and e-mail.

IETA is continuing internal discussions on precisely what information and changes it will seek from the commission and the EIB, Ruiz said.

U.K. Watchdog Softens Mortgage Rules for Existing Borrowers

Banks won’t have to apply tougher mortgage rules to existing customers after the U.K. financial watchdog softened proposals designed to rein in risky lending practices.

Lenders may “waive some of the proposed affordability requirements for existing borrowers,” the U.K. Financial Services Authority said in a review of mortgage regulations published yesterday. The FSA is seeking views on the rules, which would ban issuance of any new self-certified mortgages.

The FSA has proposed plans to rein in the U.K.’s 1.2 trillion-pound ($1.87 trillion) mortgage market, blaming some lending practices for exacerbating the banking crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The watchdog is seeking views on the proposals for the seventh time since the review began in 2009.

The regulations require lenders to assess the impact of rising interest rates in their mortgage-approval calculations and ban interest-only mortgages in cases where the borrower would have to rely on rising house prices to repay the loan.

The deadline for input runs until Mar. 30, 2012, and the FSA is due to release the final version of the rules later next year. The full set of reforms is to be implemented in 2013.

Industry Groups Publish Derivatives-Collateral Discussion Paper

A group of financial-market industry bodies published a paper discussing European governments’ derivatives collateral practices and capital rules.

The Association for Financial Markets in Europe, the International Capital Market Association and the International Swaps & Derivatives Association said in a statement today that they published the paper, entitled “The Impact of Derivative Collateral Policies of European Sovereigns and Resulting Basel III Capital Issues.”

The paper surveys the credit exposure of dealers arising out of over the counter derivatives contracts. The matter is of concern because the “majority of sovereigns do not post collateral to support their use of over-the-counter” derivatives,’’ the groups said in the paper.

Derivatives exposure of dealers “may total as much as $70 billion,” according to the groups.

Compliance Action

MF Global U.K. Administrator Says It Knows Where Money Is

MF Global Holdings Ltd.’s U.K. administrator says it found all of the British unit’s client funds and collected 82 percent of the assets.

Richard Heis, a KPMG LLP partner working on the administration, said the firm is trying to recover the remaining customer assets, some of which were held by the failed broker’s parent company in the U.S.

Trustees for the U.S. bankruptcy of MF Global Holdings have estimated that as much as $1.2 billion is missing from customer assets. Jon S. Corzine, former chairman and chief executive officer of MF Global, apologized to clients and investors for the misuse of funds in a hearing before U.S lawmakers Dec. 15.

The allegation in the U.S. “is that nobody knows where the money is,” Heis said in a phone interview Dec. 16. “We know exactly where the money is.”

The parent company, based in New York, was the fifth- largest financial company to file for bankruptcy when it sought protection on Oct. 31 after placing losing bets on European sovereign debt.

KPMG was appointed to supervise the special administration of the broker’s London unit, in the first use of a U.K. program designed to quickly unwind failed financial firms.

For more, click here.

FDIC Races Chubb to Silverton in Clash Over Failed-Bank Costs

The Federal Deposit Insurance Corp. and insurer Chubb Corp. are clashing over a Georgia bank failure as the U.S. seeks to recover costs of shutting the lender.

Silverton Bank NA was seized on May 1, 2009. That same day, Chubb sent a message to an insurance agent who worked with the bank, limiting a policy that covered its directors and officers against lawsuits, according to a government complaint filed in August. The insurer has used the amendment to deny a payout as the FDIC seeks at least $71 million from the Atlanta-based bank’s former board members and executives.

The FDIC’s push to recover funds from former leaders of failed banks is sparking more confrontations with insurers that sold directors-and-officers, or D&O, protection. The regulator said it won approval to pursue claims for more than $5 billion in damages this year, double the amount authorized through 2010.

Seventeen of the 41 suits authorized by the FDIC’s board had been filed as of Dec. 8. It takes about 18 months to study the failures and determine if legal action is appropriate and cost-effective, said Richard Osterman, FDIC deputy general counsel. The regulator will decide in coming months which additional cases to pursue as it reviews some of the more than 400 failures since 2007, he said.

For more, click here.

U.K. Regulator Fines Individuals a Record $20 Million in 2011

The U.K. Financial Services Authority issued a record 12.9 million pounds ($20 million) in fines to individuals in 2011, an increase of 47 percent from last year.

The watchdog fined both firms and individuals a total of 65.5 million pounds this year, less than the 88.4 million levied last year, according to research by law firm Reynolds Porter Chamberlain LLP. The figures differ from the FSA’s own table of fines on its website, which lists 63.4 million pounds in fines.

The watchdog fined Jaspreet Ahuja, a former client adviser at UBS AG’s wealth-management unit in London, 150,000 pounds on Dec. 16 for helping a client break Indian law through an offshore fund. HSBC Holdings Plc received the biggest single fine in 2011 and must pay 10.5 million pounds for abusive sales of investment products to elderly customers.

The 2010 figures were boosted by the FSA’s largest ever fine. JPMorgan Chase & Co.’s London unit paid out a record 33.3 million pounds in June for not properly separating client money from the firm’s accounts.

Brussels Airlines, TAP Raided by EU Over Possible Collusion

Brussels Airlines NV and Portuguese carrier TAP SGPS SA were raided by European Union antitrust regulators last week as part of an investigation into the airlines’ cooperation agreements.

The European Commission said the Dec. 13 raids were triggered by suspicions of “illegal collusion” between the airlines, expanding an initial probe started in February that focused on agreements for the sale of seats on flights between Belgium and Portugal.

EU regulators are concerned “that the agreements may go further than the sale of seats on routes where the two companies are expected to compete, itself already a departure from the more common form of code-sharing in the industry,” the commission said in a statement on its website.

The expanded probe may complicate Portugal’s efforts to sell state-owned TAP and comply with the conditions of a 78 billion-euro ($101 billion) bailout from the EU and the International Monetary Fund. Deutsche Lufthansa AG, Europe’s second-largest airline, owns 45 percent of closely held Brussels Airlines and the German carrier has an option to increase its stake.

The Brussels-based antitrust authority can impose fines of as much as 10 percent of yearly sales if it finds evidence of anticompetitive agreements between companies.

Courts

Ex-Freddie Mac, Fannie Mae CEOs Sued for Understating Loans

Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, ex-CEO of Freddie Mac, were sued by the U.S. Securities and Exchange Commission for understating by hundreds of billions of dollars the subprime loans held by the firms.

The lawsuits filed Dec. 16 in Manhattan federal court were followed by an SEC statement that it had entered into non- prosecution agreements with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.

In the lawsuits, the SEC said Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was between $2 billion and $6 billion when it was actually as high as $244 billion, according to one SEC complaint.

Washington-based Fannie Mae and Freddie Mac were seized and placed under U.S. control in 2008 as losses on soured loans pushed them to the brink of insolvency.

Mudd, now CEO of Fortress Investment Group LLC, was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008. In a statement Dec. 16, he said the federal government and investors were aware of “every piece of material data about loans held by Fannie Mae” and noted that the government reviewed and approved the company’s disclosures during his tenure.

Tom Green, Syron’s attorney at Sidley Austin LLP in Washington, didn’t immediately return a call seeking comment on the lawsuit.

The cases are SEC v. Syron, 11-cv-09201, and SEC v. Mudd, 11-cv-09202, U.S. District Court for the Southern District of New York (Manhattan).

For more, click here.

Interviews/Speeches

Burns Calls Corzine’s Testimony ‘Theater of Absurd’

Douglas Burns, a former federal prosecutor, talks about the congressional testimony of former MF Global Holdings Ltd. Chief Executive Officer Jon S. Corzine.

Burns speaks with Scarlet Fu and Stephanie Rule on Bloomberg Television’s “InsideTrack.”

For the video, click here.

--With assistance from Abigail Moses, Kit Chellel and Mathew Carr in London; David Glovin and Noah Buhayar in New York; Silla Brush, Joshua Gallu, Robert Schmidt and Craig Torres in Washington; Heather Smith in Paris; Ben Moshinsky in Brussels; and Shigeru Sato in Tokyo. Editors: Stephen Farr, 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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