Bloomberg News

Derivatives, Pools, Software, Russian Exports: Compliance

October 04, 2012

The U.S. Commodity Futures Trading Commission, facing an Oct. 12 start date for a slate of derivatives rules, is being bombarded with requests from lobbying groups to ease or delay the Dodd-Frank Act measures.

Trade associations representing agribusiness firms Bunge Ltd. (BG:US) and Archer Daniels Midland Co. (ADM:US) want to delay swap-dealer rules for non-banks. Banks and asset managers want regulators to finally say whether foreign exchange derivatives will be subject to the rules. And representatives of Ford Motor Credit Co. and Barclays Plc (BARC) have met with CFTC staff to clarify that financial entities used for asset-backed securities are exempt.

Starting Oct. 12, companies must begin tallying their derivatives trades to determine whether they will be deemed swap dealers and face Dodd-Frank’s highest capital, collateral and trading standards, which could erode their profits. The designation will capture JPMorgan Chase & Co. (JPM:US), Goldman Sachs Group Inc. (GS:US) and the other financial firms dominating a business that generates more than $30 billion in annual profit for the world’s largest banks, according to an estimate from financial consultant Oliver Wyman, a unit of Marsh & McLennan Cos.

The lobbying effort comes as the CFTC and Securities and Exchange Commission prepare to finally put rulemakings into effect more than two years after the passage of Dodd-Frank, the financial-regulation overhaul designed to reduce risk and increase transparency in the $648 trillion swaps market.

The CFTC has completed 39 rules and “substantive swaps market reform is now in sight,” Chairman Gary Gensler said in an Oct. 1 speech in London. The agency has yet to complete rules governing capital, margin, new swap-trading venues and the international scope of its measures.

Swaps and other derivatives are financial instruments based on stocks, bonds, loans, currencies and commodities that can be used to hedge risks or for speculation. Largely unregulated trading of derivatives tied to mortgage bonds helped spark a credit crisis in 2008 after the housing market collapsed.

Regulations that were set to take effect Oct. 1 about risk- management standards between brokers and their clients have already been delayed after a request from the Futures Industry Association. A separate rule governing how quickly trades must be accepted or rejected for clearing prompted requests for relief from companies including LCH.Clearnet Group Ltd., the world’s largest interest rate swap clearinghouse.

For more, click here.

Compliance Action

SEC Charges Dark-Pool Operator for Sharing Confidential Data

Dark-pool operator eBX LLC agreed to pay an $800,000 penalty to settle charges that it failed to protect customers’ confidential trading information, the U.S. Securities and Exchange Commission said.

The payment also settles allegations that eBX, which operates the Level ATS dark pool, failed to tell subscribers that it allowed a technology firm to use data about unexecuted orders, the SEC said yesterday in a statement. The outside company was identified as Lava Trading, a unit of Citigroup Inc. (C:US), in a letter from Level ATS to clients that was obtained by Bloomberg.

One of the key features of dark pools is that they don’t identify the firms that buy and sell on their systems and give out no information about their orders. The platforms are designed to eliminate the market impact of trading requests by keeping them out of public view until the moment a transaction is completed.

“Dark pools are dark for a reason: buyers and sellers expect confidentiality of their trading information,” Robert Khuzami, the SEC’s director of the division of enforcement, said in the statement. “Many eBX subscribers didn’t get the benefit of that bargain.”

This is at least the third time in the past month that the SEC has penalized an exchange or brokerage for rule violations. NYSE Euronext was ordered to pay $5 million to resolve claims that the New York Stock Exchange gave certain customers a head start on quotation and transaction market data, and the SEC charged a New York-based brokerage for allowing overseas clients to run a scheme aimed at distorting stock prices.

Whit Conary, chief executive officer of Level ATS, didn’t immediately respond to a phone message and e-mail. Scott Helfman, a spokesman for Citigroup, declined to comment.

U.K. Antitrust Regulator Delays Review of LSE-LCH.Clearnet Deal

The U.K. Office of Fair Trading has suspended the timetable for its review of London Stock Exchange Group Plc (LSE)’s acquisition of a majority stake in LCH.Clearnet Group Ltd. as the companies try to close the deal by year-end.

The regulator had originally said it would make a decision by Oct. 31.

LSE is seeking to convince regulators that the 463 million- euro ($598 million) acquisition of a stake in LCH.Clearnet, Europe’s biggest clearinghouse, won’t stifle competition. LSE owns clearing and settlement units Cassa di Compensazione & Garanzia and Monte Titoli SpA, which it acquired with its 2007 purchase of Borsa Italiana SpA. The European Commission blocked Deutsche Boerse AG (DB1)’s takeover of NYSE Euronext in February over competition concerns.

LSE sank the most in three years on Sept. 28 after saying European Union regulations will cut income at its Italian central counterparty and may require LCH.Clearnet to boost capital. LCH.Clearnet said it will need to boost capital by 300 million euros to 375 million euros to comply with the rules.

Equiduct Systems Ltd., the European trading system owned by Citadel LLC and Knight Capital Group Inc. (KCG:US), in July told U.K. antitrust regulators that the combination of LSE and LCH would stifle competition. The OFT should impose remedies before approving any transaction and ensure access to the clearinghouse is maintained, Equiduct Chief Executive Officer Peter Randall wrote in a letter to the regulator obtained by Bloomberg News.

The deal is also being examined by Portuguese regulators and has been cleared by Spanish authorities.

California Investment Adviser Faces Fraud Charges, SEC Suit

A San Francisco-based investment adviser faces federal criminal charges and a civil lawsuit by securities regulators for allegedly stealing more than $500,000 from an investor.

Hausmann-Alain Banet, chief executive officer of San Francisco-based Lion Capital Management Group, was arrested yesterday and charged with wire and mail fraud and money laundering, according to an indictment unsealed in federal court. He was also sued by the U.S. Securities and Exchange Commission.

Banet, 49, allegedly took $544,000 from a client and falsely claimed that he invested it in a hedge fund. He created false account statements showing trading gains and spent the money on personal and business expenses, prosecutors in San Francisco said in an e-mail. Banet is in custody pending an Oct. 9 bail hearing, prosecutors said.

Operators of Telephone Scam Targeted by Federal Trade Commission

U.S. government regulators announced they won a court order to halt international telephone scams in which people posing as computer technicians called tens of thousands of consumers and duped them into buying unneeded anti-virus services.

The Federal Trade Commission said yesterday that it filed charges on Sept. 24 in federal court in Manhattan. On Sept. 25, U.S. District Judge Paul Engelmayer enjoined the scams, mostly based in India, which targeted consumers in the U.S., U.K. and other English-speaking countries. The U.S. also froze $180,000 of the defendants’ assets, the FTC said.

The agency said it’s working with international regulators to increase its investigations of so-called scareware, in which con artists fool consumers into buying software and services for their computers they don’t need. On Tuesday, the agency announced a judgment of more than $163 million against a defendant in a 2008 case.

The most recent cases are “a very serious rip-off of consumers,” FTC Chairman Jon Leibowitz told reporters in Washington yesterday. “The tech scam artists have taken scareware to a new level of virtual mayhem.”

The telemarketers falsely told consumers they were from Dell Inc. (DELL:US), Microsoft Corp. (MSFT:US), McAfee Inc. and Symantec Corp. (SYMC:US)’s Norton antivirus unit and had detected malware that threatened their computers, the FTC said in a statement. To show the computer had a problem, the caller directed the consumers to a utility area of the computer that falsely showed an infection, according to the agency.

The callers offered to rid computers of the non-existent threats for fees ranging from $49 to $450. A separate scam placed ads with Google Inc. (GOOG:US) that appeared when computer users searched for a technical-support number, the FTC said.

Eleven Charged With Making Illegal Russia Military Exports

The U.S. charged 11 people with involvement in an illegal scheme to export high-tech microelectronics to Russian military and intelligence agencies.

The case is “the first-ever criminal prosecution of a large-scale Russian military procurement network operating within the United States,” said Robert Nardoza, a spokesman for Loretta Lynch, U.S. attorney in Brooklyn, New York. A federal indictment dated Sept. 28 was unsealed yesterday.

One of the accused is Alexander Fishenko, an owner and executive of both the Houston-based export firm Arc Electronics Inc. and a Russia-based procurement firm, Apex System LLC. He’s also charged with operating as an unregistered agent of the Russian government, the Justice Department said.

The microelectronics involved are subject to strict government controls, the Justice Department said. They can be used in radar and surveillance systems, weapons guidance systems and detonation triggers, according to the government. Arc shipped at least $50 million worth of microelectronics and other technology to Russia without an export license, the government said in a memorandum dated Oct. 3.

The defendants if convicted face as long as 20 years in prison on the most serious charges, violating the International Emergency Economic Powers Act and the Arms Export Control Act.

The case is U.S. v. Fishenko, 1:12-cr-626, U.S. District Court, Eastern District of New York (Brooklyn).

Enbridge Told by EPA More Cleanup of Kalamazoo River Needed

Enbridge Inc. (ENB) must do more to clean up a 2010 pipeline spill that dumped oil in Michigan’s Kalamazoo River, the U.S. Environmental Protection Agency said.

The EPA yesterday gave Calgary-based Enbridge until next August to complete its clean-up work in specific areas. The company must now submit a plan in the coming days to perform the work.

The pipeline, known as Line 6B, ruptured in July 2010 near Marshall, Michigan, and spilled more than 843,000 gallons of oil, according to the agency. The 30-inch pipeline, able to carry 290,000 barrels a day of heavy crude oil from Indiana to Ontario, was shut for about two months.

Enbridge is “reviewing” the EPA’s order, which it received this morning, and will comment further later, Terri Larson, a company spokeswoman, said in an e-mail. “To be clear, this is not a formal order or directive,” Larson said.

The oil flowed into Talmadge Creek before entering the Kalamazoo River, coating birds, muskrats and turtles in an oily residue. Enbridge has earlier clean-up orders from the EPA, and those are still in effect, the agency said.

Online Poker Payment Processor Gets Prison Term of Five Months

A Las Vegas man who worked for online poker companies was ordered to serve five months in prison for helping deceive banks into processing hundreds of millions of dollars in illegal gambling transactions.

Chad Elie, 32, was one of 11 people charged in an April 2011 indictment targeting the founders of PokerStars, Full Tilt Poker and Absolute Poker. U.S. District Judge Lewis Kaplan sentenced Elie yesterday in federal court in Manhattan.

Prosecutors allege that after the U.S. implemented the Unlawful Internet Gambling Enforcement Act in 2006, which barred banks from processing payments to offshore gambling websites, the three companies worked around the ban to continue operating in the U.S.

Elie pleaded guilty to conspiracy in March, admitting that he served as a “payment processor” for the poker companies and lied to U.S. banks about the nature of the financial transactions they were processing. In court yesterday, he apologized for his actions.

Elie’s lawyer, Barry Berke, had asked for a sentence of six months home confinement followed by probation and community service, but Kaplan said a sentence without jail time would be too lenient. Berke declined to comment on the sentence after the hearing.

In July, Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case, as well as a civil suit against the three gambling companies, announced a $731 million settlement with PokerStars and Full Tilt. PokerStars agreed to forfeit $547 million.

PokerStars agreed to acquire the assets of Full Tilt, whose U.S. victims will be able to seek compensation from the Justice Department from the funds, prosecutors said at the time.

The case is U.S. v. Tzvetkoff, 10-CR-00336, Southern District of New York (Manhattan).

Compliance Policy

T-Mobile Merger With MetroPCS Will Probably Get U.S. Approval

Deutsche Telekom AG (DTE)’s proposal to buy MetroPCS Communications Inc. (PCS:US) will probably win approval from U.S. regulators who are wary of the market power wielded by industry leaders Verizon Wireless and AT&T Inc. (T:US)

“There would be a regulatory hope this would strengthen both competitors versus the two big guys,” David Kaut, a Washington-based analyst for Stifel Nicolaus & Co., said in a telephone interview.

Bonn-based Deutsche Telekom yesterday announced it will pay $1.5 billion to shareholders of MetroPCS, the fifth-largest U.S. mobile provider, and merge the company with Deutsche Telekom’s T-Mobile USA Inc. unit, the fourth-largest carrier.

The new company would have 42.5 million subscribers, according to data compiled by Bloomberg -- or about 11.7 percent of the U.S. wireless market, compared with a 58.5 percent combined share for No. 1 Verizon and No. 2 AT&T. Sprint Nextel Corp. (S:US), the third-largest provider, has 15.2 percent

The deal, subject to review by the U.S. Federal Communications Commission and Justice Department, probably will be approved because it doesn’t pose threats to competition like those raised by AT&T’s failed bid for T-Mobile last year, Kaut said.

“To the extent this acquisition helps strengthen T- Mobile’s position and preserve a four-firm national market, it’s pro-competitive,” said Allen Grunes, an antitrust lawyer with Brownstein Hyatt Farber Schreck LLP in Washington. “I’d expect the Justice Department to look at local markets and then close the investigation and let the merger go through.”

The FCC under Democratic Chairman Julius Genachowski, in a break with Republican predecessors, has declined to declare that the U.S. wireless market is competitive.

Neil Grace, a spokesman for the FCC, which regulates airwaves’ use, declined in an e-mail to comment on how the agency might handle the deal.

Gina Talamona, a spokeswoman for the Justice Department, which would examine the deal for anti-competitive impact, declined to comment.

Monte Paschi Falls Short as EU Banks Boost Capital in Crisis

Banca Monte dei Paschi di Siena SpA and banks in Cyprus and Slovenia failed to meet European Union capital targets as lenders raised more than 200 billion euros ($258 billion) to bolster investor confidence.

The 27 banks with shortfalls that were required by the European Banking Authority to submit plans for their capital raising attained a total of 116 billion euros, the London-based EBA said yesterday. Including aid to Greek and Spanish banks, European lenders increased their capital reserves by more than 200 billion euros since 2011, according to an EBA report published on its website.

“The key positive in the response of banks to this exercise is that 75 percent of the shortfall was raised by retaining earnings and other measures -- fresh capital,” Andrea Enria, chairman of the EBA, said in an interview yesterday.

Investor confidence in the EU’s banking industry nosedived as the sovereign debt crisis faced by countries including Greece, Spain and Italy worsened last year. The EBA told European banks in December to raise 114.7 billion euros in new capital. The agency required banks to keep a core Tier-1 capital ratio of 9 percent and hold additional reserves, called a sovereign buffer, to protect against falling bond prices among euro-area nations.

Banks will be required to maintain their capital levels rather than pay out the money raised in dividends or bonuses “to be able to absorb unexpected losses and to support a smooth convergence” to tougher global standards, known as Basel III, the EBA said.

The sovereign buffer will remain in place for the time being, and will be evaluated in the future based on “the market environment,” the EBA said.

“The necessary backstops have been endorsed by the corresponding governments and are being implemented” for Monte Paschi, based in Siena, Italy, and the Cypriot lenders, the EBA said.

For more, click here.

To contact the reporter on this story: Ellen Rosen in New York at erosen14@bloomberg.net

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net


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