The securities industry misinterpreted rules it assumed allowed as many as nine months to start moving swaps into clearinghouses that are meant to limit risks to the financial system.
Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn’t need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. They were wrong, misreading one sentence in 17,000 words of regulation.
Unless lobbyists convince the Commodity Futures Trading Commission to soften the deadlines, derivatives users that speculate on or hedge against losses on everything from changes in interest rates to corporate bankruptcies may need to find cash and Treasuries to back the trades sooner than they anticipated. The 2010 Dodd-Frank Act is requiring trades be moved to the central counterparties to limit the kinds of risks that fueled panic during the 2008 credit crisis.
Clearing the trades sooner than expected may soak up as much as $50 billion in additional collateral for swaps users, according to Anshuman Jaswal, senior analyst at financial research firm Celent in New York.
The CFTC may clarify the rules before they are completed as early as next month, though it’s too early to know what changes may be made, Commissioner Scott O’Malia said in a telephone interview.
Liz Pierce, a Sifma spokeswoman, referred questions to Davis Polk. Katie Harter, a Davis Polk spokeswoman, declined to comment.
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New French State-Backed Bank Will Be Independent, Chairman Says
A new investment bank created by the French government will operate without political interference, the bank’s chairman Jean-Pierre Jouyet said in an interview on Europe 1 radio.
The bank, known as BPI, will lend exclusively to small and mid-sized businesses and will not aid large companies facing job losses, Jouyet said.
BPI will not show favoritism to projects backed by politicians, he said.
Half owned by government and half by state-owned financial institution CDC, the bank will marshal an estimated 40 billion euros in loans from existing sources, Jouyet said.
U.K. Regulator to Analyze Bank Economic Models, FSA’s Rule Says
The U.K.’s financial watchdog will analyze the economic models used by the biggest banks to prevent them concentrating risks in the financial system, a regulator said.
The Prudential Regulatory Authority will “look at models somewhat skeptically and make sure they’re appropriately conservative,” said David Rule, a U.K. banking supervisor. The agency may require changes to the models or ask for increases in capital reserves at banks that don’t satisfy criteria, Rule said in a speech in London today.
Facebook IPO Probe by SEC Said to Find No Material Data Withheld
The Securities and Exchange Commission, which started a review of Facebook Inc.’s (FB:US) May 17 IPO after its stock price plummeted, hasn’t found any evidence that the company withheld material information from investors, a person familiar with the matter said.
The SEC, whose investigation is continuing, is still looking at other IPO-related issues, including whether retail investors were harmed by misleading information from brokers or selective disclosures to analysts by the company’s bankers regarding Facebook’s mobile applications, said the person, who asked not to be identified because the probe is confidential.
Any conclusion by the SEC that Facebook made adequate disclosures of risks prior to its IPO would bolster the company’s defense against civil lawsuits filed by retail customers damaged by the sudden drop in the company’s initial $38 share price, which is about half that value now.
The firm had no immediate comment. SEC spokesman Kevin Callahan declined to comment as did Facebook in a statement.
The SEC is conducting an “in-depth review of all the participants” in the IPO, SEC Chairman Mary Schapiro said in an interview Sept. 28 on Bloomberg Television.
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NCR Says It Received SEC Subpoena Over Whistle-Blower’s Claims
NCR Corp. (NCR:US), a maker of automated teller machines and payment systems, received a subpoena from the U.S. Securities and Exchange Commission over a whistle-blower’s claims that it may have violated anti-bribery laws.
The company is cooperating with the SEC, a representative of Duluth, Georgia-based NCR, said Oct. 18 on a conference call (NCR:US).
NCR had said in August that it received claims by a “purported whistle-blower” over aspects of its business practices in China, the Middle East and Africa. The actions alleged “might constitute violations of the Foreign Corrupt Practices Act,” the August filing (NCR:US) said.
The company also is cooperating with the Treasury Department’s Office of Foreign Assets Control, and the U.S. Attorney’s office for the Northern District of Georgia, Gavin Bell, NCR’s vice president of investor relations, said Oct. 18 on the company’s third-quarter earnings call with analysts.
“We are making good progress toward completing our internal investigation in a thorough and expeditious manner” in conjunction with outside counsel, Bell said. The investigation’s goal is to refute untrue allegations by the whistle-blower and take “appropriate, remedial action” on allegations that may be true, he said.
Lou Casale, a spokesman for NCR, said in an e-mail that the company has retained the law firm Cravath Swaine & Moore LLP to assist in its investigation.
Spain Set to Extend Short-Selling Ban for 3 Months From November
Spain plans to extend a ban on short-selling for three months from the start of November as regulators take into account the “exceptional situation” facing the country’s banks.
Authorities will first extend the ban to the end of the month after it expires on Oct. 23, the markets regulator, known as CNMV, said in a statement sent by e-mail. CNMV will also begin procedures to notify the European Securities & Markets Authority of its intention to extend the prohibition for a further three months, the regulator said.
CNMV said it was taking into account the “exceptional situation” facing the banking industry because the process of restructuring it is still incomplete, the regulator said. In this context, lifting the ban on short-selling would “add uncertainty,” CNMV said.
The ban can be lifted at any time if market conditions allow, the regulator said.
AIG’s Benmosche Says Treasury May Sell Rest of Stake in 2012
The U.S. Treasury Department may sell the rest of its holdings in insurer American International Group Inc. (AIG:US) before 2013, Chief Executive Officer Robert Benmosche said.
Benmosche made the remarks Oct. 19 at an event in Madrid.
The U.S. cut its stake (AIG:US) in AIG to 16 percent from 77 percent in four share sales this year, most recently in September, after acquiring 92 percent in a bailout during the financial crisis. While the government has recouped the original cost of rescuing AIG, the success of bailing out financial firms and automakers has become an issue in the U.S. presidential campaign.
Selling more shares could help the U.S. reduce the cost of the bailouts for taxpayers.
Matt Anderson, a Treasury spokesman, declined to comment.
Carbon Offsets Tumble as EU Said to Eye Russian Credits Ban
United Nations carbon offset contracts slumped to records after the European Union proposed to ban from its market certain credits issued from next year by countries that fail to adopt new carbon goals.
The European Commission, the EU’s regulatory arm, proposed draft rules for the use of UN-sponsored Emission Reduction offsets as of 2013 in a modified draft amendment to the bloc’s carbon registry regulation at a meeting of officials from national governments on Oct. 17, according to two people with knowledge of the matter, who declined to be identified because the gathering was private.
European law allows companies in its emissions trading system to use international offsets, including ERUs, for compliance with their greenhouse-gas reduction quotas.
Emission Reduction Units are generated under the UN Joint Implementation program, which encourages investments in low- carbon energy by industrialized countries in other nations that have emission-reduction goals under the Kyoto Protocol, whose first period runs from 2008 to 2012.
The EU proposal would bar emitters in the bloc’s cap-and- trade from holding in their accounts ERUs issued after 2012 by non-EU countries such as Russia, the people said.
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Sanusi Faces Nigerian Lawmakers Seeking to Curb Bank’s Power
Nigerian central bank Governor Lamido Sanusi will today face lawmakers who are seeking to curtail his powers after he criticized them for overspending and doubled interest rates.
Sanusi, 51, is scheduled to appear at a public hearing in Parliament in the capital, Abuja, where lawmakers are debating an amendment to the Central Bank of Nigeria Act that would strip Sanusi of his position as chairman of the bank’s board. The bill also proposes that Parliament approves the bank’s budget and the board includes more external members.
As central bank governor of Africa’s largest oil producer, Sanusi has won plaudits from investors for cleaning up the banking industry and rescuing it from near-collapse in 2009. At the same time he’s drawn criticism from lawmakers, opposed to his push for spending curbs on salaries and for being too powerful within the bank.
Two months after he took office in 2009, Sanusi fired the chief executives of eight lenders after an audit found evidence of mismanagement and reckless lending. In December 2010, lawmakers demanded Sanusi apologize for saying their salaries, accounting for a quarter of the government’s recurrent spending, was damaging for the economy. He maintained that his estimates were correct.
Victor Ogene, deputy chairman of the House of Representatives Media Committee, said in a phone interview from Abuja on Oct. 19 that proposed changes to the law are aimed at having stronger institutions. The current law gives too much power to the governor and the budget is run without scrutiny, he said.
Sanusi led the Monetary Policy Committee in increasing the benchmark interest rate by six percentage points to a record 12 percent in the past two years to bolster the currency and curb inflation. His moves drew criticism from opponents.
Corbett, Rajoy, Monti Comment Europe Bank-Supervisor Process
Richard Corbett, an adviser to European Union President Herman Van Rompuy, discussed Oct. 19 the agreement by European leaders to complete a framework for a euro-area bank supervisor by year-end.
He spoke from Brussels with Maryam Nemazee on Bloomberg Television’s “The Pulse.”
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Separately, Spanish Prime Minister Mariano Rajoy and Italian Prime Minister Mario Monti spoke Oct. 18 in Brussels after European leaders committed to their goal of establishing a euro-area bank supervisor by year-end.
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Comings and Goings
Goldman Sachs Bonus System Corrupted in 2005, Smith Says in Book
Goldman Sachs Group Inc. (GS:US) changed how it calculated year-end bonuses (GS:US) in 2005, corrupting a culture of teamwork that existed previously, according to a book published by former employee Greg Smith.
Before 2005, the company determined workers’ annual awards “not just on how much business you’d brought in, but also on how good you were for the organization,” Smith, a former vice president, writes in “Why I Left Goldman Sachs: A Wall Street Story.”
“From 2005 until the present day, the system has become largely mathematical: you were paid a percentage of the amount of revenue next to your name,” a figure that could vary from 5 percent to 7 percent, wrote Smith, 33, without saying how he learned about such a change. “The problem with the new system was that people would now do anything they could -- anything -- to pump up the number next to their name.”
The account by Smith, who quit after a 12-year career at Goldman Sachs with a March 14 critique of the culture shift under Chief Executive Officer Lloyd C. Blankfein, contrasts with the “Compensation Principles” that the CEO read aloud at the May 2009 annual shareholders meeting. According to those tenets, the company’s pay practices are meant to encourage teamwork and discourage excessive risk-taking.
Smith wrote that the policy led to fights among junior and senior employees as to who would get “gross credits” relating to sales.
Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the book.
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EU Power Struggle Haunts Mersch as ECB Women Row Set to Escalate
European Parliament lawmakers will today decide whether to escalate a gender row with governments as they ponder if Yves Mersch’s appointment to the European Central Bank Executive Board would make him one man too many.
Mersch, 63, will testify to the European Union assembly’s Economic and Monetary Affairs Committee before it then votes on his candidacy for the ECB post in a session starting about 7 p.m. in Strasbourg, France. The Luxembourg central bank governor’s career move has been held up by the panel’s objection to the total lack of female policy makers at the ECB.
The ECB seat has been vacant since Jose Manuel Gonzalez- Paramo of Spain ended his eight-year term on May 31. EU lawmakers have since impeded the appointment of Mersch, raising the prospect that government leaders will need to intervene and overrule their objections to secure the move.
Two women, Sirkka Haemaelaeinen of Finland and Gertrude Tumpel-Gugerell of Austria, have previously sat on the ECB’s six-member Executive Board. If the five men currently there serve their full terms, another position won’t become available until June 2018 when Vice President Vitor Constancio retires.
Lawmakers highlighted the lack of senior female officials for years and governments simply ignored the issue until now, said Sharon Bowles, who chairs the EU Parliament committee.
Mersch’s nomination will be opposed and the committee will request European leaders submit a new candidate, according to a draft report published on the EU Parliament’s website on Oct. 19. The full Parliament will vote on the matter on Oct. 25.
Earlier, a group including former Deutsche Bank chief economist Thomas Mayer and former Bundesbank President Ernst Welteke wrote in a letter to the Financial Times that European policy makers should set aside any concerns over gender inequality at the ECB and “give priority” to Mersch’s appointment.
Gender equality and the euro “are equally important goals” that are now “conflicting,” they wrote. Priority should be given to the best available candidate, who “happens to be a man.” They pointed out that a seat on the six-member board has been empty since May 31.
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