A Federal Reserve official told lawmakers the central bank will push to reduce risk in the $1.8 trillion repurchase-agreement market by pressing the largest dealers for faster and more accurate trade confirmations.
“Enhancing the market’s resiliency and its settlement system is an important regulatory and financial stability priority,” Matthew Eichner, deputy director of the Fed’s division of research and statistics, said yesterday in prepared testimony to a Senate panel. “Supervisory efforts will yield substantial progress in eliminating the reliance of the tri- party repo market on intraday credit.”
Eichner said the Fed’s push to boost risk management in the tri-party repurchase agreement market, which neared collapse in 2008 amid the demise of Bear Stearns Cos. and bankruptcy of Lehman Brothers Holdings Inc., is taking longer than “many of us had hoped” because of delays in developing a plan to liquidate the collateral of a defaulting dealer.
In a tri-party arrangement, a third party, one of two clearing banks, functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. (JPM:US) and Bank of New York Mellon Corp. (BK:US) serve as the industry’s clearing banks. The market is the biggest single source of financing for U.S. primary dealers, the 21 firms that act as counterparties for the central bank.
“The reliance on discretionary intraday credit in the tri- party settlement process poses difficult dilemmas for cash lenders, borrowers, and clearing banks during periods of market stress,” Eichner told the Senate Banking Committee’s Subcommittee on Securities, Insurance, and Investment.
Repos are transactions used predominantly by the Fed’s primary dealers for short-term funding, and typically involve the sale of U.S. government securities in exchange for cash, generally lent by money market mutual funds. The debt is held as collateral for the loan. Dealers agree to repurchase the securities at a later date, and cash is sent back to the lender.
The Fed took over efforts to improve functioning of the tri-party repo market in February after the private-sector Tri- Party Repo Infrastructure Task Force, sponsored by the Federal Reserve Bank of New York, disbanded. The Fed said July 18 that banks should rely less on intra-day credit from clearing banks and enhance risk management.
Special Section: Knight Capital
Knight Losses Ignite Call for Stronger SEC Trading Oversight
The trading losses at Knight Capital Group Inc. (KCG:US) renewed pressure on Washington regulators to prove they are equipped to protect investors in markets that are increasingly computerized and fragmented.
The software problem and ensuing loss experienced by the company comes on the heels of other high-profile technological lapses that botched the initial public offerings of Facebook Inc. (FB:US) and Bats Global Markets Inc.
While the Securities and Exchange Commission has issued a flurry of rules aimed at tamping down rapid market swings, some former regulators, market participants and lawmakers said the measures don’t go far enough. They called for the agency to bolster its stable of experts, tighten oversight and intensify its focus on high frequency trading.
Representative Maxine Waters of California, a senior Democrat on the House Financial Services Committee, said the panel should hold hearings to get to the bottom of the turmoil.
“Though we don’t yet know precisely what caused the problem with Knight Capital, with a drumbeat of financial market snafus continuing, it’s clear that the industry, with guidance from regulators, needs to strengthen their internal controls,” Waters said.
Representative Brad Miller, a North Carolina Democrat on the Financial Services panel, said the Knight incident makes him think that markets are “disturbingly vulnerable” and worry that “the technology is not as reliable as we need.”
The SEC has opened an inquiry into the Knight incident.
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Levitt Says Knight Errors Underscore Transparency Need
Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, and Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, discussed transparency and regulation following yesterday’s trading errors attributed to a software glitch at Knight Capital Group Inc.
Levitt and Barofsky spoke with Stephanie Ruhle and Erik Schatzker on Bloomberg Television’s “Market Makers.”
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Knight Has ‘All Hands on Deck’ to Deal With $440 Million Bug
Knight Capital Group Inc. has “all hands on deck” and is in close contact with creditors, clients and counterparties as it tries to weather trading errors that cost it $440 million, Chief Executive Officer Thomas Joyce said.
Joyce said it’s “hard to comment” on discussions with creditors as Knight stock extended a two-day plunge to 75 percent and the firm explored strategic and financial alternatives following a loss almost four times its annual profit. The problems were triggered by what Joyce called “a large bug” in software as the company, one of the largest U.S. market makers, prepared to trade with a New York Stock Exchange program catering to individual investors. Some clients refrained from doing business with the firm yesterday.
Knight was fighting to preserve its business as concern grew about its solvency and pressure built for it to find a buyer or investor. Joyce said its broker-dealer subsidiaries are in compliance with capital requirements. The company is in contact with clients, counterparties and creditors as it works to recover, Joyce said.
The programming bug swept through the market at the opening of exchanges. The bad software code is gone now, he said, and some clients of the market-making business were executing with the firm by the end of yesterday after Knight told them initially to go elsewhere.
Knight has been at the center of U.S. equities trading for more than a decade. It was founded in 1995 and grew during the bull market of the late 1990s into one of the biggest traders of the technology stocks that led the market’s surge and subsequent plunge. It had 1,423 employees at the end of 2011, according to a regulatory filing.
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Small Banks Ask Break From Agency They Hoped Would Hurt BofA
U.S. community banks, which sat out the final fight over the Dodd-Frank law of 2010 expecting it would rein in their biggest rivals, are now seeking exemptions from two pending rules of the Consumer Financial Protection Bureau amid mounting concern about costs to their businesses.
In meetings with Richard Cordray, the agency’s director, the Independent Community Bankers of America has called on the agency to limit the reach of a rule on mortgage disclosures and a second one on underwriting standards for home loans.
The demands reflect a rising conviction among community banks that the bureau won’t deliver on its promise to write regulations that serve consumers while also reducing the burden on smaller banks, according to Camden Fine, president of the community bankers trade association.
Since Harvard professor Elizabeth Warren started setting up the new agency in September 2010, forging an alliance with community banks has been a centerpiece of its strategy.
Warren, who is now a Democratic candidate for the U.S. Senate from Massachusetts, argued that rules could be written in a manner that help them grab market share from major institutions such as Bank of America Corp. (BAC:US) or Wells Fargo & Co. (WFC:US)
After President Barack Obama installed him as the agency’s first director on Jan. 4, Cordray explicitly promised community bankers that, in order to limit their costs, he would consider exemptions to some rules. Such a move has drawn opposition from larger banks, which object to the unequal treatment, and from consumer groups, who argue it would repeat a pre-financial crisis mistake.
The community bankers are seeking an exemption for banks that do very few mortgages from the CFPB’s marquee project, a simplification of federally mandated disclosures that consumers get when shopping and signing for a mortgage, Fine said.
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IMF Says Serbian Central-Bank Draft Law Undermines Credibility
A Serbian draft law on the central bank, if approved by Parliament, would “undermine policy credibility” and may affect the Balkan nation’s bid for a bailout loan, the International Monetary Fund said.
“We also have reservations regarding the rushed passage of the amendments affecting the framework for financial supervision, without careful consideration by key stakeholders,” the Washington-based lender said in a statement. “Approval of these amendments would create uncertainty, undermine policy credibility, and prompt questions about the proper conduct of macroeconomic policies.”
Nomura Ordered to Improve Business by FSA on Insider Leaks
Nomura Holdings Inc. (8604), whose top two executives resigned last week to take responsibility for an insider-trading scandal, was ordered by Japanese regulators to improve its securities operations.
The action concludes an investigation started in April that revealed Nomura failed to prevent employees from providing tips to traders on at least three share sales in 2010. Nomura has lost equity and bond underwriting business amid the probe, missing out on coordinating the global $8.5 billion initial public offering of Japan Airlines Co. announced today.
Nomura said in a statement today that it will continue to enhance internal controls, prevent similar incidents and regain public trust.
The Financial Services Agency’s order, the second for Nomura in four years, requires the company to implement preventive measures it set out after an internal investigation, the regulator said in a statement today. Nomura must report to the agency on the status of its remedies, which include ethics training and stricter monitoring of communication with clients.
The FSA’s penalty comes after its investigative arm found that Nomura Securities Co. solicited clients by giving them privileged information on companies, and failed to prevent unfair trading before public offerings it managed, the Securities and Exchange Surveillance Commission said on July 31.
Nomura said in June that employees provided information on offerings it managed for Mizuho Financial Group Inc. (8411), Inpex Corp. and Tokyo Electric Power Co. to traders who short-sold the stocks before they were announced in 2010.
Today’s punishment isn’t the first for Nomura over insider trading-related breaches. The FSA ordered the firm in July 2008 to improve internal controls over how it handles corporate information after an employee was convicted of insider trading.
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China Cuts Transaction Fees for Stock Trading to Boost Market
Chinese regulators, seeking to arrest a 14 percent slide in the nation’s stock market since this year’s high on March 2, reduced transaction fees on equities trading by 20 percent.
The reduction will take effect Sept. 1 and save investors 600 million yuan ($94 million) in transaction-related fees in the final four months of the year, the China Securities Regulatory Commission said on its website Aug. 1. Separately, the official Xinhua News Agency said that China is also considering a cut in stamp duty on share trading.
The reduction follows a July 31 announcement by the Communist Party’s Politburo that pledged to continue adjusting policies to ensure stable economic growth. The Securities Times said in a front-page commentary the same day that the government should introduce measures to stabilize the stock market and boost investor confidence.
The lower fees are the latest measure to boost investor sentiment. The CSRC in recent months urged listed companies to pay more cash dividends and changed how initial public offerings are priced.
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Regulator Asks Swiss Insurers to Report on Liquidity Management
The Swiss financial regulator wants insurers including Zurich Insurance Group AG (ZURN) and Swiss Re Ltd. (SREN) to report on liquidity management practices to better understand their capital strength.
Insurers are required to give a “structured” report of their liquidity risks by the end of April 2013, the regulator said in a circular on its website yesterday. The reforms follow recommendations of the International Association of Insurance Supervisors, Finma said.
Switzerland introduced new solvency regulations for insurers in January last year to align insurers’ risks with the capital they hold. Insurers in the European Union will be faced with similar regulation from January 2014 .
“Alongside capital management, liquidity management provides a holistic view of capital strength and is a central element of financial corporate governance,” the regulator said. “It means the ability of a company to meet due payment obligations in full and in time.”
Navistar Tumbles After Receiving Letter From SEC
Navistar International Corp. (NAV:US), the maker of International brand trucks, fell as much as 11 percent after it disclosed a U.S. Securities and Exchange Commission inquiry and withdrew its full-year earnings forecast.
The company had declined 35 percent this year through Aug. 1.
The Lisle, Illinois-based company said it received a letter from the SEC requesting additional information related to accounting and disclosure matters, without providing more details, and is “cooperating fully.” Navistar, which has been developing an engine to meet U.S. emission standards after its earlier technology failed to comply, said in a statement that it is withdrawing its yearly forecast until the release of its third-quarter earnings next month.
Navistar also said Columbus, Indiana-based Cummins Inc. (CMI:US) will supply it with its urea-based aftertreatment system. As part of the non-binding agreement, Cummins’s technology will be added to Navistar’s in-cylinder engine to meet Environmental Protection Agency 2010 emission standards.
“The actions announced today establish a clear path forward for Navistar and position the company to deliver a differentiated product to our customers and provide a platform for generating profitable growth,” Daniel C. Ustian, Navistar’s chairman and chief executive officer, said in the statement.
The U.S. Court of Appeals in Washington on June 12 threw out a U.S. Environmental Protection Agency interim rule that allowed Navistar to keep selling noncompliant engines if it paid penalties of as much as $2,000 each.
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RBS’s CEO Blames Libor-Manipulation on ‘Handful’ of Individuals
Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester sought to limit the damage from the Libor-rigging scandal, blaming a “handful” of employees for attempting to manipulate the benchmark rate.
RBS dismissed four employees for trying to influence the individual responsible for Libor submissions following an internal investigation, the bank said today, without identifying the staff involved. Hester said it is too early to estimate the potential cost of fines and litigation linked to rate-rigging.
Libor is the third misstep to hit RBS in the past 14 months. U.K. banks have already set aside more than 8 billion pounds ($12.4 billion) to compensate customers improperly sold products to insure loan repayments, and are also being probed for misselling interest-rate swaps to small businesses.
Separately, RBS said a computer failure in June that left many of its 15 million account holders unable to access their accounts for days will cost the bank about 125 million pounds. RBS may be fined by regulators 420 million pounds to settle the probe.
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Bristol-Myers Executive Ramnarine Accused of Insider Trading
Bristol-Myers Squibb Co. (BMY:US) executive Robert Ramnarine was charged with insider trading for making $311,361 in illegal profit by buying stock options in three companies targeted for acquisition.
Ramnarine has been placed on administrative leave, according to Bristol-Myers.
The Federal Bureau of Investigation arrested Ramnarine, 45, and he appeared yesterday in federal court in Newark, New Jersey, where he was released on $250,000 bond. Ramnarine’s jobs included executive director of pensions and savings investments and assistant treasurer for capital markets. He bought stock options on companies as he was conducting due diligence research on them, violating his duty not to profit from inside information, according to the FBI.
Ramnarine did computer searches to gain information on how to avoid detection by securities regulators, according to the U.S. Securities and Exchange Commission, which sued him yesterday.
After court, Peter Carter, Ramnarine’s assistant federal public defender, declined to comment.
“Bristol-Myers Squibb has clear and strict policies prohibiting trading on material nonpublic information and is cooperating with the government’s investigation,” Ken Dominski, a company spokesman, said in an e-mail.
The case is U.S. v. Ramnarine, 12-mj-8121, U.S. District Court, District of New Jersey (Newark).
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Germany Pleased Draghi Sees Eye to Eye on No ESM Bank License
European Central Bank President Mario Draghi’s view that the euro’s permanent rescue fund doesn’t warrant being given a bank license is to be welcomed, said German Economy Minister Philipp Roesler, who is leading the country during Chancellor Angela Merkel’s summer vacation.
Draghi’s view backs up Germany’s position on the primary role of national governments in taming the crisis, in their maintaining budget discipline and making their economies competitive, Roesler said in an e-mailed statement.
Draghi made the remarks on ECB policy at a press conference in Frankfurt.
Frank Says Principal Forgiveness Important for Economy
U.S. Representative Barney Frank, a Massachusetts Democrat, talked about the outlook for regulation in light of recent financial market scandals.
Frank, who spoke with Stephanie Ruhle and Erik Schatzker on Bloomberg Television’s “Market Makers,” also discussed the Federal Housing Finance Agency’s decision not to allow principal forgiveness on mortgages backed by Fannie Mae (FNMA:US) and Freddie Mac. (FMCC:US)
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