A plan to give investors the same level of protection when buying South African investment-grade corporate debt as they get with junk bonds is dividing the nation’s money managers.
The proposals being debated include limits on further borrowing, which will enhance the safety of the debt, said Jason Lightfoot, a portfolio manager at Futuregrowth Asset Management. Stricter covenants may reduce the bond market’s attraction as issuers will have to maintain the debt safeguards on an ongoing basis, Investec Asset Management’s Simon Howie said.
The Association for Savings and Investment South Africa, whose members together manage about 4 trillion rand ($450 billion), is debating standardized debt covenants, the Cape Town-based body said by e-mail.
Prudent underwriting practices have deteriorated with the inclusion of so-called covenant-light transactions and less- than-satisfactory risk management practices, according to March 22 guidance from the U.S. Federal Reserve, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. Covenant-light loans carry fewer safeguards for creditors such as limits on how much debt a company can add to its balance sheet.
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EU Set to Approve ECB Bank Oversight Law, Ireland’s Noonan Says
European Union nations are set to back laws to hand the European Central Bank oversight powers, even as Germany considers making a declaration voicing its concerns about the legal basis of the plans, Michael Noonan, Ireland’s finance minister, told reporters.
Noonan said he’s confident that the measures will be approved at a two-day meeting of the bloc’s finance ministers that begins today in Dublin, Ireland. Germany’s declaration may be published alongside the draft law, he said.
EU leaders called last year for the ECB to take on oversight powers to help break the link between banks (BEBANKS) and governments. The adoption of the legislation enshrining the new powers snagged last month when Germany requested a series of changes to the draft accord.
OCC Asks for Enforcement Powers Against Banks’ Consulting Firms
The U.S. regulator for national banks wants Congress to expand the agency’s authority to sanction independent consulting firms for wrongdoing in their work for lenders.
Daniel P. Stipano, deputy chief counsel for the Office of the Comptroller of the Currency, made remarks on the subject in testimony prepared for a Senate Banking subcommittee hearing in Washington yesterday.
Senator Sherrod Brown, an Ohio Democrat, is holding the hearing amid scrutiny of consultants such as Promontory Financial Group LLC and Deloitte & Touche LLP over their roles in a failed review of banks’ faulty U.S. foreclosures. He said the committee should consider the OCC’s plea for heightened enforcement powers, and he said he hoped “to clarify the foggy relationship” between consultants and regulators.
In enforcement settlements, regulators often require banks to hire consultants to perform or review fixes. Stipano said it would be useful for regulators to have additional reach into that work, and also to have jurisdiction when banks outsource work to consultants.
Facing the 2011 review of potential errors in more than 4 million foreclosures, the OCC and Fed put the task in the hands of independent consultants. When the process did not produce compensation to harmed borrowers after 18 months, regulators scrapped the initial approach in favor of a $9.3 billion settlement, saying that too much money had been paid to consultants.
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SEC Crowdfunding Delay Faulted for Stunting Business Growth
U.S. small-business growth is being stunted by regulators’ delay in issuing rules to permit so-called crowdfunding and other means of raising capital, company owners and an academic told lawmakers.
The House Small Business Committee held a hearing yesterday in Washington to examine the Securities and Exchange Commission’s work to implement the Jumpstart Our Business Startups Act, enacted last year with the goal of spurring job creation. The SEC has missed deadlines for writing rules including ones that would let hedge funds advertise for investors and allow startups to raise money over the Internet.
The hearing underscored frustration among lawmakers and business owners over the lack of progress on the rules. SEC Chairman Mary Jo White, who took the agency’s helm April 10, has said she will prioritize completion of the rules.
SEC officials didn’t disclose when they will issue the new rules, according to their prepared testimony. They said the agency has released guidance to help companies use portions of the law that don’t require rulemaking.
Lona Nallengara, the SEC’s acting director of corporation finance, said in a statement that the commission and staff “are moving forward on various rule-makings” and “look forward to completing the remaining provisions as soon as practicable.”
The JOBS Act generally limits equity crowdfunding investments to the greater of $2,000 per person or five percent of one’s annual income or net worth. People with more than $100,000 in annual income can invest as much as 10 percent of their income or net worth.
The SEC is considering allowing people to self-certify to a brokerage or crowdfunding portal how much they can invest, reducing paperwork requirements, Nallengara told the committee.
Lloyds Banking Said to Probe Two Traders Over Libor-Rigging
Lloyds Banking Group Plc (LLOY), the second-largest U.K. government owned lender, is probing two money-markets traders over their alleged role in the rigging of interest rates, three people familiar with the matter said.
Andrew Reed, who had input the firm’s submissions to the yen London interbank offered rate, was put on leave in June over allegations he held improper discussions about the benchmark, said two of the people, who asked not to be identified because the investigation isn’t yet complete. The firm is also probing communications by Andrew Doe, a yen cash-trader and rate setter who left the bank in the middle of 2009, the people said.
“As with many others in the sector, the group is assisting various regulators in their ongoing investigations into the setting of Libor,” Lloyds said in a statement. “Until these investigations are completed, it would be inappropriate for us to comment any further.” Both Reed and Doe weren’t contactable through directory assistance and Internet searches.
The two traders are the current focus of regulators’ probes into Lloyds’s involvement in attempts to manipulate the benchmark for more than $300 trillion of securities worldwide, one of the people said. The London-based lender is unlikely to reach a settlement with regulators this year, one of the people said. So far, the probe has uncovered no evidence that senior managers were involved, the people said.
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Netflix Lists Facebook, Twitter as News Outlets After Ruling
Netflix Inc. (NFLX:US), the subscription video-streaming service, said it may use Facebook and Twitter to release material information now that U.S. regulators have cleared the practice.
The company listed the social-media services operated by Facebook Inc. (FB:US) and Twitter Inc. as possible outlets for news in a regulatory filing (NFLX:US) April 10 and said it will continue to make financial announcements on its website, in filings and in press releases.
The move furthers Chief Executive Officer Reed Hastings’s role in legitimizing the use of social media to disseminate financial information. The U.S. Securities and Exchange Commission last week ended an investigation of Hastings and the company, clearing them for his Facebook posts that regulators deemed material. The new guidelines clear companies to use Facebook and Twitter as long as investors are notified first.
In its filing, the company said it may release material information on its Facebook or Twitter feeds, Hastings’s Facebook page or on the Netflix Blog and Netflix Tech Blog.
Hastings, 52, stirred controversy over SEC disclosure rules when he wrote in a July 3 post on Facebook that viewing on Netflix’s streaming service had “exceeded 1 billion hours for the first time” in June. Hastings serves as a director (FB:US) at Facebook.
Hastings said in a January interview at Bloomberg’s New York headquarters that he’s “not going to back down and say it’s inappropriate. I think it’s perfectly fine. Sometimes you’re just the example that triggers the debate.”
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Luxembourg Plans to Sell Stake in BGL BNP Paribas to Cut Debt
Luxembourg plans to sell its minority stake in BGL BNP Paribas SA (BNP), the country’s second-largest retail bank, to reduce debt before a $2.6 billion bond matures in December.
Luxembourg still owns 34 percent of BGL BNP Paribas, which it acquired in the first government attempt to rescue Fortis in 2008 by converting 2.5 billion euros ($3.3 billion) of debt into equity of Fortis’s local banking subsidiary.
BNP Paribas SA, based in Paris, controls BGL BNP Paribas through its Belgian unit BNP Paribas Fortis SA. The largest French bank also bought a direct stake of almost 16 percent in BGL from the Luxembourg government in an all-share transaction in May 2009 that gave the country a 1 percent holding in BNP Paribas.
Bank Risk Models to Face Further Basel Probe on Capital Concerns
Banks face further scrutiny from global regulators into their risk models amid concerns lenders are underestimating the amount of capital they need to cope with losses.
Initial studies of how lenders measure risk on assets they intend to trade as well as those they intend to hold to maturity found “substantial” differences in the amount of capital different banks hold against identical securities, the Basel Committee on Banking Supervision said in a report to finance ministers from the Group of 20 nations and central bank chiefs.
Banks’ modeling choices are a “key source of variation,” the group said. “Further analysis is therefore under way, and areas where Basel committee standards might be modified to reduce excessive variation are becoming apparent.” The committee is considering tightening its rules to narrow banks’ freedom to design models and said it’s also weighing the need for tougher scrutiny by supervisors and stronger disclosure requirements.
The Basel committee is reviewing banks’ risk models as part of its oversight of how well nations are implementing an overhaul of capital rules. The requirements it sets are measured as a percentage of lenders’ risk-weighted assets. The latest round, known as Basel III, states that banks should have core reserves equivalent to 7 percent of their RWAs.
Broker Defrauded NFL, NBA Players, Industry Regulator Says
Success Trade Securities, Inc. was sued by the brokerage industry’s self-regulator over claims it sold fraudulent promissory notes to professional athletes.
Fuad Ahmed, the chief executive officer of the Washington- based firm, raised more than $18 million since 2009 from 58 investors, many of whom are current or former players in the National Football League and National Basketball Association, the Financial Industry Regulatory Authority said in a complaint issued yesterday.
Finra, which didn’t disclose the names of the harmed investors, filed a temporary cease-and-desist order to halt the alleged misuse of investors’ funds and assets.
Ahmed sold promissory notes offering annual interest rates ranging from 12 percent to 26 percent, Finra said. To meet the monthly interest obligations, the brokerage issued and sold additional notes to new and existing investors, according to the complaint.
A phone call and e-mail to the firm were not immediately returned.
Wheatley Says Structured Products Like Spread Bets ‘on Steroids’
Structured products are a “perfect example” of securities where banks have overloaded investors with information without ensuring they understand the risks, according to the head of a new U.K. regulator.
The products, which typically package debt with derivatives, have “often been mind-bogglingly complicated financial gambles,” according to Martin Wheatley, chief executive of the Financial Conduct Authority. They are “almost like spread bets on steroids,” he said in a speech April 10.
Regulators in the U.S. and Europe are seeking to increase transparency for the securities after they came under scrutiny following the financial crisis in 2008 for being overly complex. Rules requiring banks in the European Union to provide concise information outlining the characteristics and risks of the products they sell could be in place by the end of 2014, according to the European Commission.
Wheatley highlighted a so-called auto-callable structured note where investors lock up money for between one and six years with their returns dependent on the share prices of three technology companies, as an example of a complex product.
Enria Calls for Binding Rules on Cross-Border Bank Loss-Sharing
The European Union needs “clear and binding criteria” for sharing losses when cross-border banks fail, European Banking Authority Chairman Andrea Enria said.
Enria called on the EU to avoid “exclusive reliance” on national budgets and nationally oriented bailouts for banking woes, according to an article prepared for a conference in Dublin yesterday that was obtained by Bloomberg News. That has hurt cross-border banking activity as regulators and banks have retreated within national borders, he said.
The Brussels-based European Commission is developing plans for a single resolution authority to handle bank failures within the euro zone and other nations that sign on for oversight by the European Central Bank, which is due to become the currency bloc’s bank supervisor next year.
Enria urged the EU to broaden the resolution plans to include all 27 EU nations, including those like the U.K. that neither use the euro nor plan to join the ECB oversight regime.
Comings and Goings
RBS Japan Unit Chief Resigns as Bank Punished for Libor Breach
Royal Bank of Scotland Group Plc’s Japan brokerage head resigned after the country’s financial regulator punished the unit for attempts to manipulate benchmark interest rates.
RBS Securities Japan Ltd. country representative Ryusuke Otani left the firm today and was replaced by Shoji Taniguchi, it said in a statement on its website. The Financial Services Agency ordered the firm to improve operations, the regulator said in a separate statement.
The punishment comes two months after the unit pleaded guilty to wire fraud as part of a $612 million settlement with the U.K. and U.S. for rigging the London interbank offered rate. More than a dozen banks and brokers are being probed worldwide for influencing benchmarks including Libor, the benchmark for at least $300 trillion of securities.
RBS must submit a report to the FSA by May 13 describing how it will improve compliance and prevent a recurrence, the regulator said.
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High-Speed Trader Said to Be Under Consideration for SEC Post
Chris Concannon, an executive at high-frequency trading firm Virtu Financial LLC, is under consideration to oversee trading and markets at the U.S. Securities and Exchange Commission, according to people briefed on the discussions.
Concannon met April 10 with the new SEC chairman, Mary Jo White, to discuss the opening, said the people, who spoke on condition of anonymity because the meeting was private.
In the 1990s, Concannon worked at the SEC in the same division, which monitors exchanges, brokerages and dark pools, where prices aren’t publicly displayed. A partner and executive vice president at Virtu, Concannon has held top jobs at early electronic trading platforms and at Nasdaq OMX Group Inc. (NDAQ:US)
White, an ex-prosecutor, lacks expertise in market regulation and has identified high-frequency trading and market complexity as priorities for her term at the SEC, which began April 10. Concannon, with his inside view of automated modern markets, would be a departure for a division that has typically been run by attorneys with little trading experience.
Concannon, 45, wouldn’t comment about his talks to run the SEC’s Trading and Markets Division. SEC spokesman John Nester also declined to comment.
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