Bloomberg News

Swaps Collateral, Egypt Sukuk Start, SEC-Bond: Compliance

October 18, 2012

Goldman Sachs Group Inc. (GS:US), Morgan Stanley (MS:US) and other trading firms would face higher collateral costs under swaps-market rules proposed by the U.S. Securities and Exchange Commission.

SEC commissioners voted 5-0 yesterday to seek public comment on collateral requirements for swaps that remain in the over-the-counter market instead of being settled at third-party clearinghouses. The proposal, part of the agency’s rulemaking under the Dodd-Frank Act, would also increase capital requirements for dealers of swaps tied to single securities or loans or a narrow index of swaps.

The SEC and Commodity Futures Trading Commission are leading U.S. rulemaking to limit risk and boost transparency after unregulated swaps contributed to the 2008 credit crisis.

Under the proposal, dealers in swaps tied to securities would need to set aside a fixed amount of capital and a percentage of the collateral they collect to back trades. The measure calls for dealers to have capital equal to an additional 8 percent of their collateral for cleared and non-cleared trades. The largest brokerages that use internal computer models to comply with capital rules would need to double their minimum capital to $1 billion.

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Compliance Policy

Hollande Says Summit’s Main Decision Is on Banking Supervisor

French President Francois Hollande said a two-day European Union summit that begins today in Brussels will focus on implementation of the European Central Bank’s role as chief banking supervisor for the euro area.

“The subject of the summit isn’t fiscal union but banking union,” Hollande told reporters today in Brussels. “The only decision we have to take, to confirm in fact, is the putting into place of a banking union by the end of the year, notably the first step, which is the banking supervision.”

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U.S. Senators Ask Bank Regulators to Focus on Simple Leverage

Two U.S. senators joined the call for regulators to rely less on complicated Basel capital rules and more on straight- forward leverage ratios to reduce risk in the financial system.

Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Republican of Louisiana, urged the Federal Reserve and two other bank regulators to “focus on the level of pure tangible common equity at financial institutions,” according to a letter they sent yesterday. The Basel Committee on Banking Supervision’s capital requirements, approved in 2010 and scheduled to take effect next year, are too complicated, they wrote.

The Basel rules have come under attack for increased complexity and allowing banks to game the system by playing with their risk models. Thomas Hoenig, a Federal Deposit Insurance Corp. board member, said last month that they should be scrapped in favor of the leverage ratio. Unlike Basel’s main capital requirement, the leverage ratio measures equity compared to total assets, ignoring whether they’re deemed risky or safe by the bank or regulators.

The senators join Bank of England officials Andrew Haldane and Robert Jenkins, and former FDIC Chairman Sheila Bair in urging that the leverage ratio be the main factor in capital calculations. While the revised Basel rules have a leverage requirement, it’s secondary to the risk-based considerations.

Basel’s proposed 3 percent leverage ratio -- which means a bank’s assets can be 33 times its common equity -- is too low to ensure the financial system’s safety, the senators said, without offering their own figure. Bair has called for an 8 percent requirement, while Hoenig has said about 10 percent is reasonable. That would force the four largest U.S. banks to sell more than $300 billion of stock, according to data compiled by Bloomberg.

The Fed, FDIC and the Office of the Comptroller of the Currency are in the process of implementing the Basel rules. The three regulators have published the U.S. version of the framework and are soliciting comments until Oct. 22.

ECB’s Legal View on Bank Oversight Design Due Early November

The European Central Bank aims to complete its view on how to design a euro-area bank supervisor in the first half of November, a spokesman said yesterday.

ECB lawyers are studying how the Frankfurt-based central bank could take on bank oversight for the 17-nation currency area without interfering with monetary policy. The ECB is also examining how the supervisor could include views of non-euro- area countries that volunteer to join the banking plan.

Ultimate authority at the ECB rests with its Governing Council, which is made up of only euro-area members. Nations outside the currency bloc have said they might veto the banking union plan unless it includes a way to include all participating countries in oversight decisions.

The European Commission unveiled proposals in September. Last week, European Union lawyers gave their input to a compromise prepared by Cyprus in its role holding the EU’s rotating presidency.

The EU lawyers concluded that there should be changes to how the new bank supervisor would interact with the European Banking Authority, a London-based agency that coordinates disputes among regulators, according to two people familiar with the matter.

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Compliance Action

Egypt to Tap Global Sukuk Market After Law Enactment, IMF Loan

Egypt has received interest from foreign banks amounting to $750 million to $1 billion for a sukuk sale after it passes the requisite law and reaches an International Monetary Fund agreement, an official said.

The Finance Ministry plans to begin the debt sale process after receiving “clearance” from Prime Minister Hisham Qandil, its head of debt management Samy Khallaf said in an e-mailed statement yesterday. The ministry has submitted a first reading of a draft law that must be approved by parliament or the president -- who holds legislative powers as the chamber was dissolved in June -- he said.

Egypt wants to diversify borrowing as short-term yields remain the second highest in the Middle East after Yemen. Overseas investors have shunned domestic notes since the start of a popular uprising in January 2011 on concern the Egyptian pound may be devalued, a step officials including President Mohamed Mursi have said won’t happen. Foreign reserves dropped 58 percent since then to $15 billion in September, or enough for about three months of imports, central bank data show.

An IMF team is due to visit Cairo by the end of the month, when Egypt hopes it can reach a preliminary agreement for a loan of $4.8 billion. In addition to enacting a sukuk law, executive regulations for that legislation also need to be set, Khallaf said.

The Finance Ministry plans to issue the debt as a sovereign entity.

SEC Probes Bankrupt San Bernardino, California, on Bond Sales

A U.S. Securities and Exchange Commission “informal inquiry” of San Bernardino, California’s finances requires the bankrupt city to preserve bond documents and communications with underwriters.

The nature of the agency’s inquiry isn’t detailed in the Oct. 11 letter from Robert H. Conrrad, a Los Angeles-based SEC senior enforcement counsel, to City Attorney James Penman. It calls on city officials to preserve all records of securities offerings and written communications with underwriters, fiscal advisers and credit ratings companies.

“There are a lot of areas that need to be covered by the SEC,” Penman said yesterday. “The city attorney and the city council are pleased that they’re coming in to look at things.”

The SEC has stepped up efforts to enforce disclosure rules that apply to states and cities that raise money from investors, and has said it plans to recommend ways to improve regulation of the $3.7 trillion municipal-bond market.

In San Bernardino, a city of 209,000 about 60 miles (100 kilometers) east of Los Angeles, the county Sheriff’s Department said a probe of possible criminal activity in City Hall had begun several months before the city sought Chapter 9 court protection on Aug. 1.

Judith Burns, an SEC spokeswoman in Washington, declined to confirm the agency probe.

San Bernardino, the third California city to enter bankruptcy this year, relied on a variety of budgetary maneuvers to stay solvent, such as redirecting money from restricted accounts, Andrea Travis-Miller, the interim city manager, said in a July interview. None of those actions appeared to be illegal, she said then.

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Sun Life Fined $969,000 by U.K. Regulator for Governance Failure

The Financial Services Authority fined Sun Life Assurance Company of Canada 600,000 pounds ($969,000) for failings in the governance of its with-profits business.

The firm’s U.K. committee “failed to adequately review” two transactions in 2008 and 2009, and risked a lack of “proper independent judgment” in making deals, the FSA said in an e- mailed statement.

The transactions affected around 114,000 insurance policies, the FSA said in the statement.

“The Sun Life Financial Inc. (SLF) organization has very strong governance and risk-management standards and practices across its family of companies,” the company said in an e-mailed statement. “The concerns about the decision-making processes for the transactions did not affect the policyholders.”

Regulators have increased their focus on governance since the 2008 collapse of Lehman Brothers.

Courts

Ex-SocGen Banker’s Severance-Pay Case Reaches U.K.’s Top Court

A former Societe Generale SA (GLE) banker who already won 11 million euros ($14.4 million) in a severance dispute is seeking more from the bank as the case reached the U.K.’s top court -- a first for the financial-services industry.

Raphael Geys, a former managing director of European fixed- income sales at the bank, has said he is entitled to 12.5 million euros. He sued the bank in 2010 saying he was owed more than the 8 million euros in severance offered to him under the terms of his contract.

Another U.K. court ruled in 2010 that the bank didn’t “appropriately” word a November 2007 letter firing Geys. The banker has said his contract was terminated in January 2008, while the Paris-based bank claims his employment ended in November 2007, Geys’s lawyer David Cavender said at yesterday’s Supreme Court hearing in London.

“You cannot terminate the contract of a senior employee without telling” them that it has come to an end, he said.

The two-day hearing will be the first time a financial- service industry compensation argument will be ruled on by Britain’s most-senior judges, according to Ben Wilson, a court spokesman. Bankers and traders who say they were treated unfairly by their employers during and after the financial crisis are increasingly turning to British courts and employment tribunals seeking compensation.

The case is: Raphael Geys v. Societe Generale, claim no. HC08C02683, High Court of Justice, Chancery Division (London).

Ex-UBS Banker Bagios Set to Change Plea in Tax Evasion Case

Christos Bagios, a former banker at UBS AG (UBSN) and Credit Suisse Group AG (CSGN) who was arrested in January 2011 amid a U.S. crackdown on offshore tax evasion, is scheduled to change a not guilty plea he entered yesterday, according to court records.

Prosecutors charged Bagios last year with helping 150 American clients hide as much as $500 million from the Internal Revenue Service when he worked at UBS, where he spent 15 years before joining Credit Suisse in 2009.

He was charged Oct. 16 in federal court in Fort Lauderdale, Florida, in a document known as a criminal information, which typically precedes a guilty plea. Bagios was arraigned yesterday on the conspiracy charge in Fort Lauderdale and pleaded not guilty. He is scheduled to return to court in West Palm Beach, Florida, for a change-of-plea hearing on Oct. 26.

Bagios and other Swiss bankers conspired to “assist U.S. customers in concealing assets and income from the U.S. government, including the IRS,” according to the charge filed yesterday.

Bagios declined to comment after the hearing yesterday.

He is one of about two dozen foreign bankers, lawyers or advisers charged since 2008 in the crackdown on offshore tax evasion.

The case is U.S. v. Bagios, 12-cr-60260, U.S. District Court, Southern District of Florida (Fort Lauderdale).

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Yorkville Advisors Made $10 Million on Inflated Assets, SEC Says

Yorkville Advisors LLC, a New York hedge-fund firm, reaped at least $10 million in excess fees after overvaluing assets it managed and exaggerating returns to hide losses, U.S. regulators said in a complaint.

Mark Angelo, Yorkville’s founder and president, and Edward Schinik, the firm’s chief financial officer, enticed pension funds and other clients to invest more than $280 million since 2008 by making false claims about the safety and liquidity of their investments, the Securities and Exchange Commission said in a lawsuit filed yesterday in U.S. District Court in Manhattan.

The case is the seventh to come from an SEC initiative to identify and probe firms reporting returns that outpace benchmarks for their stated investment strategy. Investigators found that Yorkville also withheld adverse information from its auditor, enabling the firm to carry some of its largest investments at inflated values, the SEC said.

The firm disputes all of the SEC’s allegations, “as they lack merit and are entirely without support,” Angelo said in a statement.

“Yorkville at all times has acted appropriately and implemented robust control procedures to ensure the proper valuation of assets,” he said in the statement, noting that the company employed two former SEC enforcement lawyers on its valuation committee. “After enduring an SEC investigation that was clearly driven by an agenda, Yorkville looks forward to defending this matter and having the SEC subject to the supervision of a federal district court.”

Interviews

BOE’s Tucker Says Bank Pay Must Be Tied to Performance

Bank of England Deputy Governor Paul Tucker spoke in London about bank pay rules, culture and supervision.

Tucker, who spoke at the annual conference of the British Bankers Association, also discussed the impact of the European crisis on competition. Peter Thal Larsen moderated.

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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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