Bloomberg News

ISDA Probe, Too-Big-to-Fail, Basel Risk-Plan: Compliance

March 27, 2013

The International Swaps & Derivatives Association, a financial industry derivatives group, is being probed as part of a European Union antitrust investigation into how data on credit derivatives is shared.

Regulators found “indications that ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business,” the European Commission said in a statement yesterday. The EU started a probe in April 2011 into whether 16 lenders, including Citigroup Inc. (C:US) and Deutsche Bank AG (DBK), colluded by giving pricing information to data provider Markit Group Ltd.

The EU’s probes add to separate antitrust investigations into whether banks colluded to manipulate benchmark lending rates, including the London interbank offered rate. The U.S. Justice Department is also probing the credit derivatives clearing, trading and information services industries.

Global regulators have sought to toughen oversight of the credit-default swap market, arguing the trades helped fuel the financial crisis. The EU has the power to levy fines as much as 10 percent of revenue in antitrust cases.

The commission “is examining whether a number of investment banks may have used Markit, the leading provider of financial information in the CDS market, to foreclose the development of certain CDS trading platforms,” the regulator said. “This could have been achieved through collusion or an abuse of a possible collective dominance.”

ISDA is cooperating with regulators and “is confident that it has acted properly at all times and has not infringed EU competition rules,” the organization said in an e-mailed statement. Markit officials didn’t respond to a phone call seeking comment.

ISDA, based in New York and founded in 1985, has more than 800 member institutions from 60 countries, according to its website. As well as banks, the organization represents governments, investment managers, law firms and accountants.

For more, click here.

Compliance Policy

Denmark Reviews Bail-In Law as ‘Terrorists’ Shape Banking

Denmark, the European Union nation that led the way in burden-sharing two years ago, is now reviewing its commitment to the bail-in legislation as the euro area makes its first try in Cyprus.

The country, whose banks hold assets about four times the size of its $300 billion economy, may reclaim the option to bail out its biggest banks after a government-appointed committee recommended the adjustment to existing laws.

“To have a principle that we would never, under any circumstances, save a bank -- that’s like saying you would never trade with terrorists,” Michael Moeller, chairman of Denmark’s committee on systemically important financial institutions, said in an interview with Bloomberg News’s Frances Schwartzkopff. “But what if they had an atomic bomb that could blow up half the United States?”

Denmark is reconsidering its stance on bail-ins after losing 23 percent of its banks to a real estate bubble that burst in 2008.

Lawmakers in Denmark pledged in 2010 not to bail out banks after taking unprecedented steps to support the industry in the wake of the global financial crisis two years earlier. Less than a year after passing the bail-in bill, two regional lenders failed, shutting most of the nation’s banks out of international funding markets as investors balked at the prospect of losses.

The Sifi committee unveiled its recommendations this month, naming Denmark’s six biggest banks as too big to fail. The designation means the lenders will need to set aside as much as 5 percentage points in additional capital. The committee also proposed giving the regulator broader powers and requiring banks to pay into a fund to finance potential bailouts.

The opposition Conservative Party has already signaled it will try to block the higher capital requirements while the Danish Bankers Association said the measures would force banks to cut lending and imperil an economic recovery.

Europe agreed to bail out Cyprus after the nation caved in to demands that it shut down its second-largest bank and force losses on uninsured depositors and bondholders, including senior creditors.

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Senators Give Unanimous Support to Ending Too-Big-to-Fail Banks

U.S. Senators voted 99-0 in support of a non-binding measure calling for an end to implicit subsidies the credit markets give banks with more than $500 billion in assets because of the perception that the federal government would bail them out.

The amendment, sponsored by Senators David Vitter, a Republican from Louisiana, and Sherrod Brown, a Democrat from Ohio, is seen as an early gauge of support for a bill the two lawmakers said they will introduce next month to provide economic incentives for banks to reduce their size.

Brown said the goal of the legislation is to take way the “economic advantage the market gives” large banks and to reduce the risk they pose to the entire financial system.

The upcoming bill would impose additional capital requirements on the largest banks -- defined in the amendment as those with more than $500 billion in assets. The new capital rules wouldn’t include risk weights that “can be manipulated and gamed,” Vitter said on the Senate floor on Feb. 28.

Six U.S. banks have more than $500 billion in assets: JPMorgan Chase & Co. (JPM:US), Bank of America (BAC:US) Corp., Citigroup Inc., Wells Fargo & Co. (WFC:US), Goldman Sachs Group Inc. (GS:US) and Morgan Stanley. (MS:US)

For more, click here.

Sarris Muffles Calls for Cypriot Exit from Euro After Rescue

Finance Minister Michael Sarris sought to muffle calls for Cyprus to weigh a precedent-setting exit from the euro to ease the economic pain inflicted by the country’s 10 billion-euro ($13 billion) bailout.

The option of eventually pulling out of the currency was floated March 25 by Christopher Pissarides, a Nobel prize winner now advising the government, and Nicholas Papadopoulos, head of the parliament’s finance committee.

“It would be catastrophic to even talk or entertain the idea and much less exit the euro zone,” Sarris said yesterday in a Bloomberg Television interview with Ryan Chilcote in Nicosia. “Our place is in Europe, our place is in the euro zone and we will do whatever it takes to stay there.”

Cypriot banks have been closed except for limited cash- machine withdrawals since an initial, later revised, rescue accord was reached on March 16. On March 25, the government extended the bank holiday until tomorrow.

Controls on capital movements to prevent money from draining out of the banking system -- allowed in exceptional circumstances under European Union law -- will remain for “a matter of weeks,” Sarris said. Restrictions may be “less stringent” on banks other than Bank of Cyprus Plc, the largest bank, which will take over viable assets left over from the shutdown of Cyprus Popular Bank Pcl (CPB), the second-largest.

Banks May Face Tougher Risk-Concentration Limits in Basel Plan

Global regulators are seeking to toughen curbs on how much business large global banks can do with each other as part of a push to prevent lenders from keeping risks too concentrated.

A “key lesson from the crisis is that material losses in one systemically important financial institution can trigger concerns about the solvency of other SIFIs, with potentially catastrophic consequences for global financial stability,” the Basel Committee on Banking Supervision said yesterday in a statement on its website.

The group said it wants input on how to strengthen so- called large-exposure limits that force banks to diversify the range of companies and other lenders they work with. The Basel group is drafting updated risk concentration limits as part of a third wave of measures to overhaul bank rulebooks since the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

Under yesterday’s proposals, a bank identified by regulators as being of global systemic importance should be prevented from investing an amount equivalent to more than 15 percent of its core capital in transactions with another bank of similar size and importance.

The plans would add to existing Basel guidance that the amount of business a bank can do with a single counterparty should be capped at no more than 25 percent of its capital.

BOE Says U.K. Banks Have Capital Shortfall of $38 Billion

U.K. lenders were told by the Bank of England to raise 25 billion pounds ($38 billion) of additional capital, less than analyst estimates.

Banks need to set aside more money than they already have to cover bigger potential losses on commercial real estate and from the euro zone, possible fines for mis-selling and stricter risk models, the Bank of England said following a report by the Financial Services Authority. The central bank didn’t identify or quantify the number of lenders that need to bolster capital.

The BOE said that expected loan losses could exceed provisions by 30 billion pounds, while future fines and conduct- related penalties could be 10 billion pounds more than banks expect. It said lenders underestimated assets weighted for risk by 170 billion pounds, leading to a 12 billion-pound capital shortfall in that category.

The full impact of the three areas could deplete lenders’ capital by 52 billion pounds, less than the 60 billion-pound estimate that emerged from the BOE’s November Financial Stability Report. Some banks already have enough resources to cover them, paring the shortfall to 25 billion pounds, the BOE said today.

Lenders will have to reach a common equity tier 1 capital ratio of 7 percent of risk-weighted assets by the end of 2013. While some banks already exceed this level, those that don’t will have to boost capital or restructure their balance sheets without hindering lending to the economy, the BOE said.

HSBC Holdings Plc (HSBA) and Standard Chartered Plc, the two British banks that get most of their profit from Asia, have the strongest core Tier 1 capital ratios under Basel III at 9.8 percent and 10.7 percent respectively. Barclays Plc (BARC) has a ratio of 8.2 percent, Lloyds Banking Group Plc (LLOY) 8.1 percent and Royal Bank of Scotland Group Plc (RBS) 7.7 percent.

Miles Tax Must Replace Levy U.S. Won’t Raise, LaTourette Says

Abolishing the U.S. gasoline tax and replacing it with a levy based on miles driven could happen by today regardless of hurdles to implementing it, said a former top Republican on the House Transportation and Infrastructure Committee.

The gasoline tax, which Congress hasn’t raised since 1993, needs to be ended because lawmakers won’t increase it, former Representative Steve LaTourette said yesterday in an interview with Bloomberg News’s Angela Greiling Keane. Policymakers could immediately replace it with a tax of about 1 1/2 cents per mile that could be collected in ways that alleviate privacy concerns, he said.

The existing taxes are 18.4 cents a gallon on gasoline and 24.4 cents on diesel fuel.

Lawmakers are due to reauthorize a bill next year on surface transportation spending and will have to decide how to replace declining revenue in the Highway Trust Fund or how to cut spending on highways and transit as usage of both increases.

Replacing the $54.5 billion raised for highway and transit projects from fuel taxes and other sources would require an average vehicle-miles tax rate of about 1.8 cents a mile, according to data compiled by the Federal Highway Administration. That’s based on the 2.97 trillion miles (4.77 trillion kilometers) driven in 2010. A motorist driving 12,000 miles a year, at that rate, would pay about $216 a year.

India Plans New Rules for Companies Pawning Shares to Borrow

India’s capital market regulator will frame stricter rules for companies and owners pledging shares as collateral to borrow funds after uneven disclosures resulted in some small companies plunging 80 percent last month.

The Securities & Exchange Board of India is also planning to overhaul regulations for insider trading, as well as share repurchases, Chairman U.K. Sinha said in Kolkata yesterday. The regulator set up a panel on March 5 to review insider trading rules. Indian companies had pledged as much as 1.5 trillion rupees ($28 billion) of shares to lenders as of Dec. 31, Morgan Stanley said in a report on Feb. 21.

Sinha is reviewing regulations to raise corporate governance standards in the $1.2 trillion market. A dozen companies on the S&P BSE500 index plunged last month amid speculation the shares pledged by company’s founders in return for loans have been sold. Core Education & Technologies Ltd. (CETL) crashed 80 percent, Gravita India Ltd. (GRAV) 38 percent and ABG Shipyard Ltd. (ABGS) 17 percent in the period.

Compliance Action

Citigroup Ordered by Fed to File Anti-Money-Laundering Plans

Citigroup Inc., the third-biggest U.S. lender, must show the Federal Reserve it has tightened safeguards to prevent a repeat of money-laundering violations.

Regulators told the New York-based company to explain procedures put in place to improve compliance with the Bank Secrecy Act and anti-money-laundering regulations, known as BSA/AML, the Fed said in a consent order yesterday.

The bank failed to conduct proper due diligence on customers and was too slow to file so-called suspicious activity reports, the Office of the Comptroller of the Currency said in April. The deficiencies prevented Citigroup from identifying risky customers and monitoring client relationships, the regulator said.

The Fed said it acted after regulators including the OCC and the Federal Deposit Insurance Corp. filed orders last year against bank subsidiaries Citibank NA and Banamex USA because of deficiencies they found.

The Bank Secrecy Act requires banks to report all large cash deposits to help prevent crimes such as drug trafficking and terrorist financing.

Nynas Bid for Shell Hamburg Refinery Assets Faces EU Probe

Nynas AB’s bid for Royal Dutch Shell Plc (RDSA)’s Hamburg oil refinery assets faces a European Union investigation over possible competition concerns for oils used for industrial products.

The EU extended its deadline to rule on the deal until Aug. 8. The acquisition would remove the only competing producer of naphthenic base oils which is used to make industrial greases, metalworking fluids, adhesives, inks, fertilizers and other products, regulators said in an e-mailed statement.

“The commission needs to make sure that it would not raise production costs for European companies as well as prices for the customers of the various end products,” EU Competition Commissioner Joaquin Almunia said in the statement.

Nynas, a venture of Neste Oil Oyj (NES1V) and Petroleos de Venezuela SA, agreed to buy part of the facility, including a base-oil plant, tank farms and jetties, after Shell said in 2011 that it would halt fuels product after failing to find a buyer for the northern German plant. Shell said last month it would cease diesel and gasoline output as it converts the refinery to storage.

Hans Oestlin, a spokesman for Nynas in Stockholm, said the company will cooperate with the commission and expects to receive a positive outcome.

Indonesia Blocks U.S. Request for WTO to Probe Farm Import Rules

Indonesia blocked a U.S. request for World Trade Organization judges to probe Indonesian curbs on imports of horticultural goods, animals and animal products ranging from beef and vegetables to fruits and dried flowers.

The U.S., which challenged Indonesia on Jan. 10, said non- automatic import licenses and quotas hinder trading and break global commerce rules. Indonesia won’t be able to block a second U.S. request for the Geneva-based WTO to set up a panel of judges to rule on the complaint.

“Indonesia has created a complex web of import-licensing requirements that, along with quotas, have the effect of unfairly restricting U.S. exports,” the U.S. Trade Representative’s Office said in a March 14 statement from Washington. “These measures appear to be designed to protect Indonesia’s domestic agriculture industry.”

Indonesia adopted rules in late 2011 and tightened them last September to include what the U.S. called even more onerous requirements for horticultural imports. In December, Indonesia announced “drastic reductions in quotas for beef and other animal product imports, further restricting access to the Indonesian market,” the USTR said.

U.K. Will Split Border Agency to Create Faster Visa Service

The U.K. Border Agency will be split into a visa-issuing body and an immigration-policing organization after it struggled to deal with arrival lines at airports and caused long waits for visas.

In a statement to Parliament in London yesterday, Home Secretary Theresa May said both the new bodies will be moved back into the Home Office, to be under her direct responsibility, rather than being managed at arm’s length, as UKBA was.

The visa service will focus on making it easier for people to visit the U.K., taking quick decisions, May said. UKBA had a backlog of 312,726 immigration cases in the three-month period ending in September 2012, according to a report published March 25 by Parliament’s Home Affairs Committee.

U.K. Broker Jailed After $4.5 Million Currency Investment Fraud

A former U.K. foreign-exchange broker was sentenced to five years in jail for defrauding investors of about 3 million pounds ($4.5 million).

Ian Dickinson collected more than 11 million pounds from investors, betting about 750,000 pounds on foreign-exchange markets and losing about 200,000 pounds, U.K. prosecutors said yesterday on their website.

Dickinson, who pleaded guilty in February to one charge of participating in a fraudulent business as a sole trader, returned 8 million pounds to his investors, the Crown Prosecution Service said. He was sentenced yesterday at court in Essex, England.

Prudential Fined $45 Million, CEO Thiam Censured on AIA Bid

Prudential Plc (PRU) was fined 30 million pounds ($45 million) and Chief Executive Officer Tidjane Thiam was censured for not telling the U.K. finance regulator soon enough that it planned to acquire American International Group Inc. (AIG:US)’s Asian subsidiary.

The insurer didn’t inform the Financial Services Authority of the proposed acquisition of AIA in 2010 until after the deal was leaked to the press, the regulator said today in a statement. Prudential failed to disclose it at a meeting between FSA regulators and the insurer two weeks before the leak, even after being asked about growth plans for the Asian market.

Prudential “should have informed the FSA at the earliest opportunity to allow the FSA to decide whether to approve or reject the deal on regulatory grounds,” the agency said in the statement. “The failure to inform the FSA was significant, because it resulted in the FSA having to consider highly complex issues within a compressed timescale before making a decision as to whether to suspend Prudential’s shares.”

The fine is the fifth-largest from the FSA, and the second- highest penalty that’s unrelated to Libor manipulation.

Thiam, 50, was publicly reprimanded by the FSA because he played a “significant role” in the decision not to tell the agency about the deal, according to the statement. He wasn’t individually fined.

Prudential made a record $35.5 billion bid for AIA Group Ltd. (1299), then the Asian unit of AIG, in March 2010, which failed three months later when shareholders balked at the price.

Courts

Monsanto and DuPont Drop Antitrust, Soybean Patent Lawsuits

Monsanto Co. (MON:US) and DuPont Co. (DD:US), the world’s largest seed companies, agreed to drop their respective antitrust and soybean patent lawsuits and enter into licensing agreements for making genetically modified crops.

Monsanto will ask the St. Louis federal court to dismiss its claim that DuPont infringed patents for Roundup Ready soybeans, setting aside a $1 billion jury award, the companies said yesterday in a joint statement. DuPont will ask the court to dismiss its claim that Monsanto uses monopoly power to stifle innovation.

The agreement follows recent legal victories by St. Louis- based Monsanto over its smaller rival in the $34 billion seed market. A U.S. jury in August ordered DuPont to pay Monsanto for infringing seed patents, and the U.S. Department of Justice and state attorneys general dropped probes late last year into industry antitrust concerns raised by DuPont.

In the agreements announced yesterday, DuPont’s Pioneer seed unit will license the newest versions of Monsanto soybeans engineered to tolerate Roundup and another weed killer and make a series of royalty payments to Monsanto totaling $1.75 billion through 2023, the companies said. Monsanto gains access to DuPont patents for crop-disease resistance and a corn- defoliation technique.

The cases are Monsanto Co. v. E.I. duPont de Nemours & Co., 09-cv-686, U.S. District Court, Eastern District of Missouri (St. Louis) and Pioneer Hi-Bred International Inc. v. Monsanto Co., 11-cv-497, U.S. District Court, Southern District of Iowa (Des Moines).

For more, click here.

EPA Clean Water Act Rules Thrown Out by U.S. Appeals Court

U.S. Environmental Protection Agency wastewater treatment rules deemed to have been adopted in a pair of letters sent to a U.S. senator in 2011 were struck down by a federal appeals court.

The EPA sent the letters to Iowa Senator Charles Grassley while he was acting as an intermediary between the agency and the Iowa League of Cities, which the St. Louis-based court said had seen a gap between the regulator’s municipal sewer-water treatment rules and its expressed expectations.

The agency argued that the letters should be considered policy statements or interpretations of existing rules referred to in the correspondence. They contained new, improperly created regulations, one of which exceeded the EPA’s authority, the court said March 25.

A unanimous three-judge panel declared both rules were created in violation of the federal Administrative Procedures Act, which requires public notice and comment.

The case is Iowa League of Cities v. Environmental Protection Agency, 11-3412, U.S. Court of Appeals for the Eighth Circuit (St. Louis).

Ex-Foundry Networks Executive Charged in Insider-Trading Scheme

A former Foundry Networks Inc. executive was charged in what prosecutors called a $27 million insider-trading scheme with tipping a California hedge fund analyst about the company’s acquisition by Brocade Communications Systems Inc. (BRCD:US)

David Riley, 47, the former chief information officer for Foundry Networks, and Matthew Teeple, 41, an analyst for an unidentified San Francisco-based hedge fund, were charged yesterday in a felony complaint filed in federal court in Manhattan, prosecutors said. The U.S. Securities and Exchange Commission also sued the two, as well as third man, John V. Johnson.

Riley and Teeple are charged with conspiracy and securities fraud. The most serious charge of securities fraud carries a sentence of as long as 20 years in prison, Manhattan U.S. Attorney Preet Bharara’s office said. Johnson, 46, of Arvada Colorado, who the U.S. said was a portfolio manager for a Denver-based firm, pleaded guilty to insider-trading charges on March 18 before U.S. District Judge John Keenan in New York.

On July 16, 2008, Riley provided secret tips about Foundry being acquired by Brocade to Teeple before the deal was announced on July 21, 2008, prosecutors said. Within two hours of his conversation with Riley, Teeple called an analyst at the unidentified investment adviser, causing the fund to execute trades based on the inside information, according to the U.S.

In total, trading on the tips, one investment adviser earned more than $16 million and avoided losses of more than $11 million, Bharara’s office said.

The criminal case is U.S. v. Riley, 13-mag-00806, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Teeple, 13- cv-02010, U.S. District Court, Southern District of New York (Manhattan).

For more, click here.

Interviews

Iran Raises Possible Cyber Threat Concern, Smocer Says

Paul Smocer of the Financial Services Roundtable talked about U.S. legislation to bolster cybersecurity and current cyber threats.

He spoke with Stephanie Ruhle and Scarlet Fu on Bloomberg Television’s “Market Makers.” To watch the video, click here.

Yellen Leading Fed Would Bring Continuity, Mishkin Says

Frederic Mishkin, a professor at Columbia University and a former Federal Reserve governor, talked about the outlook for the central bank’s leadership, and the European Union’s bailout of Cyprus.

He spoke with Stephanie Ruhle and Scarlet Fu on Bloomberg Television’s “Market Makers.” To watch the video, click here.

To contact the reporter on this story: Michael Bathon in Wilmington at mbathon@bloomberg.net

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


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