U.S. exchanges and some brokers will be required for the first time to conduct coordinated trading tests to show they can recover from natural disasters or terrorist acts, according to a rule proposed by regulators.
The mandate, called Regulation Systems Compliance and Integrity, directs exchanges to strengthen their technology and instruct member firms to participate in tests to show they can sustain operations after a large disruption. The rule published last month covers testing, disaster preparedness and software development. It will govern 44 firms, including 17 exchanges.
The Securities and Exchange Commission is seeking to limit technology breakdowns at venues handling stock, options and bond trades and ensure they can withstand malfunctions that could jeopardize markets. Regulators wrote the 373-page rule, known as Reg SCI, after the May 6, 2010, flash crash, when the Dow Jones Industrial Average plunged 9.2 percent before recovering, and last year’s breakdowns that spoiled the initial public offerings by Bats Global Markets Inc. and Facebook Inc.
Initial compliance costs for organizations subject to the regulation and those that must conduct testing may be as high as $242 million, with another $191 million in annual costs, the SEC estimated.
The regulation would apply to exchanges, clearinghouses, 15 alternative trading platforms including 10 dark pools, systems that disseminate public quote and trade data, the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board and others.
Reg SCI will replace the SEC’s Automation Review Policy guidelines, developed in 1989 and 1991 after the 1987 market crash known as Black Monday, when the Dow average plummeted 23 percent.
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Exchange CEOs Said to Seek Dark-Pool Limits in SEC Talks
The chief executive officers of NYSE Euronext (NYX:US), Nasdaq OMX Group Inc. (NDAQ:US) and Bats Global Markets Inc. met with U.S. Securities and Exchange Commission officials yesterday to discuss the migration of trading from their venues to dark pools.
The meetings in Washington followed requests by the exchanges that regulators consider measures to curb dark pools, which let traders buy and sell large orders that aren’t publicly displayed. Possible restrictions include a “trade-at” rule that would allow dark pools to execute trades only if they offered better prices than are available on exchanges. They currently can trade at the best prices exchanges provide.
SEC staff members didn’t commit to consider any new rules and said the agency would continue to discuss the matter, according to a person with direct knowledge of the matter who requested anonymity because the meetings aren’t public. SEC Commissioner Daniel Gallagher, one of two Republicans on the five-member panel, said yesterday he was meeting with the CEOs of Nasdaq OMX and Bats.
Exchange executives met with SEC Chairman Elisse Walter and staff to discuss topics concerning market structure, including dark pools, John Nester, an SEC spokesman, said in an e-mail. Officials at the agency will continue the “dialogue on these issues with all the affected stakeholders,” he said.
Less regulation and fewer hurdles for brokers to start venues have boosted off-exchange trading, Duncan Niederauer, CEO of NYSE Euronext, owner of the New York Stock Exchange, said in congressional testimony last June. More than 40 dark pools trade U.S. stocks.
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European Banks May Face $1.6 Trillion Funding Gap, McKinsey Says
European banks face a 1.2 trillion-euro ($1.6 trillion) shortfall in funding as regulators implement stricter liquidity rules, according to McKinsey & Co.
That deficit will probably grow by 200 billion euros by 2018 based on estimates for deposits and economic growth, the New York-based consultant said in a study published today. France and Italy face the biggest gaps in the euro area, while the Netherlands and Finland have the largest surpluses, McKinsey said, citing European Central Bank data and its own analysis.
European regulators are strengthening banks by setting minimum levels of so-called stable funding they must hold and limiting the type of financing that qualifies. With lower demand for bank debt and deposit growth slowing, those rules may raise longer-term borrowing costs for the wider economy, McKinsey said.
The European corporate bond market would have to triple from about 900 billion euros to a size comparable to those of the U.S. and U.K. to close the gap, McKinsey said. The region’s economy relies on banks to provide about 60 percent of its 19.7 trillion euros in credit demand, the consultant said.
The study was completed in February.
The new rules will “impose additional stresses” unless they are changed, McKinsey said.
MasterCard Faces EU Antitrust Probe Into Payment-Card Fees
MasterCard Inc. (MA:US) faces a European Union antitrust probe into bank fees on foreign card payments such as when tourists go shopping in the 27-nation bloc.
The European Commission said the levies -- and other possible practices including higher fees for traders accepting so-called premium cards aimed at affluent customers -- may be anti-competitive, slowing down cross-border business and harming customers through higher prices.
The probe increases the pressure on the Purchase, New York- based company over card charges in Europe. The company faces about a dozen lawsuits in the U.K. over cross-border fees and a previous EU decision in 2007 found that MasterCard unfairly inflated the transaction fees paid by retailers for processing payments. The EU regulator said it will also examine MasterCard rules applying to merchants’ transactions that stop them benefiting from better conditions by banks elsewhere in the bloc.
“MasterCard intends to fully cooperate with the commission,” the company said in an e-mailed statement. “As a global electronic payments company MasterCard always aims to balance the interests of both consumers and retailers to ensure that each party pays its fair share of the costs for the benefits it receives.”
Philips Pays $4.5 Million to Settle Poland Bribery Case With SEC
Royal Philips Electronics NV (PHIA) was fined $4.5 million by the U.S. Securities and Exchange Commission because of alleged bribery in Poland.
The Amsterdam-based company said in an e-mailed statement yesterday that it accepted to pay the fine imposed by the SEC to settle the matter.
The world’s largest maker of patient-monitoring systems said in 2011 that it fired three employees indicted in Poland in connection with alleged bribes paid to win medical-equipment sales to hospitals in 1999 to 2006. A court case against the former Philips workers and 16 hospital directors accused of paying or receiving a total of about 3 million zloty ($95,000) began in 2011 and hasn’t finished.
Philips said it informed the U.S. Justice Department and the SEC of the results of an internal investigation into medical equipment sales after the indictments. As part of the remedial measures, Philips terminated and disciplined several Philips Poland employees and installed new management at Philips Healthcare in Poland.
Philips said the Justice Department informed the company in October 2011 that it doesn’t intend to pursue the matter further.
U.K. Finance Regulator Investigating RBS Over Technology Failure
The U.K.’s consumer-finance regulator is probing technology failures at Royal Bank of Scotland Group Plc, which left some customers at the lender’s NatWest and Ulster Bank units unable to withdraw money.
The Financial Conduct Authority, which took over from the Financial Services Authority last week, started “an enforcement investigation into the IT failures at RBS which affected the bank’s customers in June and July 2012,” according to a statement on its website yesterday.
The two banks extended opening hours at more than 1,000 branches in the U.K. and Ireland after the technical problems, which started on June 19.
The computer failure caused problems with cash withdrawals and money transfers for NatWest customers and a delay in processing payments for Ulster Bank customers.
“Last summer’s IT failure was unacceptable,” RBS said in an e-mail. “Our customers deserve service they can rely on 100 percent of the time and that’s what we want to provide.”
The FCA said it will “reach its conclusions in due course and will decide whether or not enforcement action should follow.”
BOE Offer of $125 Billion to Banks Punishes Savers: U.K. Credit
U.K. savers are losing as Chancellor of the Exchequer George Osborne’s program to boost lending gives banks access to 82 billion pounds ($125 billion) of cheap money, reducing the need to compete for deposits from the public.
The average interest rate for tax-free savings accounts, known as ISAs, fell to 1.83 percent this month from 2.65 percent for April 2012, according to Moneyfacts, a price comparison firm. That compares with consumer-price inflation of 2.8 percent in February. Banks using the Funding for Lending Scheme pay as little as 0.75 percent including fees for funds.
The program, which began in August, is fueling concern that efforts to spur the economy are helping borrowers at the expense of savers, particularly retirees who rely on interest to provide an income.
Funding for Lending, created by the Bank of England and the Treasury, is designed to reduce interest rates for households and companies. It allows banks and mutual lenders to borrow Treasury bills from the central bank for a fee of as little as 0.25 percent. They can then use the bills as collateral to raise wholesale funds at below-market interest rates.
Banks rewarded borrowers by cutting interest rates.
The fall in savings rates is intensifying the pressure on households struggling with rising energy bills, as consumer prices increased at their fastest pace in nine months in February, the Office for National Statistics said on March 19.
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Ambac Financial Reaches Settlement With U.S. Tax Authorities
Ambac Financial Group Inc. (ABKFQ:US) and its bond-insurance unit will pay $101.9 million as part of a settlement with Manhattan U.S. Attorney Preet Bharara and U.S. tax authorities.
The agreement would include future possible payments of as much as $14.9 million and resolves a dispute stemming from tax methods, Bharara said in a statement yesterday. The accord would bar Ambac from taking $1 billion in future offsets against its income. It includes a resolution with the Internal Revenue Service that paves the way for Ambac to complete its bankruptcy.
The agreement, which still needs court approval, will give the IRS a $120 million claim in Ambac’s Chapter 11 case, according to court papers filed in Manhattan bankruptcy court April 8.
“This settlement puts us in a favorable position to emerge from bankruptcy and move forward with managing our existing business and exploring new business opportunities,” Diana Adams, Ambac’s president and chief executive officer, said in a statement.
The holding company case is In re Ambac Financial Group Inc., 10-15973, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Crapo Says He Opposes Setting Capital Standards With Legislation
Senate Banking Committee ranking member Michael Crapo, a Republican from Idaho, said setting capital standards for large banks should be a decision for regulators, not lawmakers.
“On the capital issue, clearly we need to have the correct and safe capital levels established,” Crapo said in an interview. “I think that’s a function that the regulators who have the expertise should achieve, should focus on. It certainly is not a political decision.”
Crapo’s comments put him at odds with the concept behind a bill by Senators Sherrod Brown, a Democrat from Ohio, and David Vitter, a Republican from Louisiana, that would set capital standards for the largest banks, in part to prevent banks from being perceived as too big to fail. Vitter and Brown say that the capital standards proposed by regulators are too low.
Crapo said he prefers to attack the too-big-to-fail perception with “an enhanced bankruptcy procedure rather than to pursue a government break up.” He said he has not read the Brown-Vitter bill.
A draft of the measure would require U.S. regulators to scrap international Basel III requirements and instead impose a higher capital standard: 10 percent for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets. The Senators plan to introduce their bill later this month.
Lacker Says Government Should Be Ready to Let Big Banks Fail
Federal Reserve Bank of Richmond President Jeffrey Lacker said plans to limit the size or change the structure of the largest financial institutions must be made with the intent of allowing a failure without government aid.
“It makes perfect sense to constrain the scale and scope of financial firms in a way that ensures that they can be resolved in an orderly manner, without government protection for creditors,” Lacker said.
Lacker made the remarks in a speech at the University of Richmond, in Virginia.
U.S. regulators and lawmakers are searching for ways to limit the risk that a large bank failure will result in another taxpayer-funded bailout. Senate Republicans and Democrats are discussing legislation that would boost capital standards, while Fed officials are discussing ways to limit the safety net and curb balance-sheet expansion at the largest banks.
Lacker advocated “creating a credible funding plan that avoids adverse effects, without resorting to government” financing “might seem daunting.”
“I see no other way to achieve a situation in which policy makers consistently prefer unassisted bankruptcy to incentive- corroding intervention and investors are convinced that unassisted bankruptcy is the norm,” he said.
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Comings and Goings
KPMG Fires Partner London Over Leaks on Herbalife, Skechers
KPMG LLP fired the head of its Los Angeles audit practice after learning that he provided inside information to someone who used it to trade stocks.
The partner, Scott London, was the lead auditor for Skechers U.S.A. Inc., according to David Weinberg, the shoemaker’s chief financial officer. Herbalife Ltd. (HLF:US) and Skechers said in statements that KPMG is withdrawing as their auditor. The U.S. Justice Department and the Securities and Exchange Commission are investigating the partner’s actions, according to people with knowledge of the situation.
Senior KPMG executives visited Skechers on April 8 and told Weinberg about the misconduct, he said. They said no questions were raised about the company’s financial reports and that they believe London is the only auditor involved, he said.
London issued a statement by e-mail in which he admits to leaking by phone over a period of years to a person who traded on the information. London, who didn’t return messages for comment, said he was trying to help a person whose business was struggling.
“I regret my actions in leaking non-public data,” London said in the statement. “KPMG had nothing to do with what I did. The firm bears no responsibility in this matter. These actions were by my choice and mine only.” His statement was published earlier by the Wall Street Journal.
Harland W. Braun, an attorney for London, said KPMG isn’t a target of the investigation. London confessed his actions to investigators last week, then informed KPMG, Braun said in a phone interview. The third party is cooperating, Braun said.
Seth Oster, a spokesman for KPMG in New York, declined to comment beyond the company’s statement, as did Barb Henderson, a spokeswoman for Herbalife. Calls for comment to the U.S. Attorney’s Office in Los Angeles weren’t immediately returned.
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Nolan, Muldoon Among Favorites to Succeed Elderfield, Odds Show
Ann Nolan, an official at the Irish Finance Ministry, is favored to succeed Matthew Elderfield as Irish Central Bank Deputy Governor and head of financial regulation, odds signal from Paddy Power Plc, an online betting forum.
Nolan’s odds are 4-1, meaning a successful 1-euro stake would return a 4-euro profit, Dublin-based Paddy Power said. John Moran, head of the finance ministry, is 6-1, while central bank official Fiona Muldoon is 9-1, the bookmaker said.
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