Bloomberg News

EU Money Market Rules, Swaps, Living Wills: Compliance (1)

September 04, 2013

Banks and asset managers running money-market funds face a regulatory push from the European Union amid warnings from lenders that the plans may kill off part of the $4.7 trillion global industry.

Michel Barnier, the EU’s financial services chief, will call for the funds to hoard easy-to-sell assets and in some cases to meet minimum capital requirements, in a bid to limit the scope for excessive risk-taking, according to a document obtained by Bloomberg News.

Regulators need to counter the threat of “investor runs” on a fund, according to the document, a draft version of proposals to be presented by Barnier today. Money funds, a type of investment vehicle focused on short-term, high-quality assets, “play a central role in the short-term funding of entities like banks, corporations and governments” meaning a run could have “broader macroeconomic consequences.”

Regulators are working to impose tighter restrictions on money-market funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on the industry that helped freeze global credit markets.

The EU plans include requiring money-market funds (FNSXX:US) that maintain a fixed share price to build up a cash buffer equivalent to 3 percent of their assets, according to the draft.

Funds that are already in place before the rules become law would have three years to fully meet the cash-buffer requirement.

The European Fund and Asset Management Association, a group representing the investment-management activities of banks including HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM:US), has warned that setting capital requirements for money funds risks destabilizing their business model and confusing investors, who may simply look elsewhere.

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Compliance Policy

EU Agency Backs Some U.S. Swaps Rules in Bid to Counter Overlaps

European Union regulators said that many U.S. rules for over-the-counter derivatives are as tough as EU standards, in a move that may shield banks from having to comply with two sets of requirements.

U.S. rules on the use of clearinghouses and trade repositories are broadly in line with EU measures, the European Securities and Markets Authority said yesterday. EU-based banks would be allowed to only comply with U.S. rules for some activities in the country if the European Commission agrees with ESMA’s assessment.

The U.S. and EU have brokered a deal to resolve clashes in their regulation of the $633 trillion swaps market. The accord broke a deadlock over whether the U.S. could impose its rules on trades booked in Europe. Banks and other swaps traders said the deal reduces the chance they will be forced to comply with conflicting regulatory regimes.

The accord only partly settled how swaps rules will apply across borders and averted a regulatory crisis. Both sides said further negotiations would be needed on a range of issues.

Chantal Hughes, a spokeswoman for the commission in Brussels, couldn’t be immediately reached for comment on the agreement.

Global Watchdog to Set Creditor-Loss Rules for Failing Banks

Global regulators said they would seek to protect taxpayers from having to bail out failing banks by drawing up international rules on creditor losses.

The Financial Stability Board will propose rules next year to ensure that big banks and other too-big-to-fail financial institutions hold subordinated debt and other liabilities that can be written down in an emergency. The group will also address provisions in derivatives contracts that can deepen crises.

Regulators across the world have been grappling since the 2008 financial crisis to make markets more resilient and to take taxpayers off the hook for rescues. European Union nations alone provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since the collapse of Lehman Brothers Holdings Inc., according to EU data.

The EU plans “substantively implement” overarching bank-failure principles published by the FSB in 2011, Bank of England Governor Mark Carney said.

He said the FSB would ensure compatibility of steps by different nations.

By the end of 2014 global regulators will “develop proposals for contractual or statutory approaches to prevent large-scale early termination of financial contracts,” the FSB said in a report on its future plans published Sept. 2.

India Asks Exchanges to Calculate Circuit Limit on Daily Basis

The market regulator has modified index-based circuit breaker norms, the Securities & Exchange Board of India said on its website.

Circuit breaker limits of 10 percent, 15 percent and 20 percent are to be based on the previous day’s close. Trading (NTMBIV) will resume after a halt with a 15 minute, pre-open call auction session.

Exchanges should implement changes from Oct. 1, according to the statement.

ESMA Gives Conditional Backing to U.S. OTC Derivatives Rules

The European Securities and Markets Authority made a provisional recommendation that U.S. rules for regulating over-the-counter derivatives should be deemed equally rigorous as EU standards.

The verdict, which is intended to make it easier for firms to operate cross-border without having to apply overlapping rules, needs to be confirmed by the European Commission before it can take effect.

The European Commission is the executive body of the European Union.

Compliance Action

Olympus Is Charged With Misleading Auditors by U.K. Agency

Olympus Corp. (7733), whose former president revealed a $1.7 billion accounting fraud that lasted 13 years, was charged in the U.K. for allegedly deceiving auditors at a subsidiary.

Olympus’s Gyrus Group Ltd. unit misled auditors between April 2010 and March 2011, the Serious Fraud Office said in a statement today. The first court hearing on the matter will take place Sept. 10, the SFO said. The potential financial impact of the prosecution on Olympus’s business is unclear, the company said in a statement to the Tokyo stock exchange.

Former Olympus President Michael Woodford said in October 2011 that he asked the SFO to investigate a report by PricewaterhouseCoopers about payments made by the Japanese company to advisers in a 2008 deal. Woodford went public with his knowledge of the dealings after the Olympus board fired him. The company was fined 700 million yen ($7 million) in Japan and three executives pleaded guilty to covering up losses at the maker of endoscopes and cameras.

“We just received the notice last night and so are still going through it,” said Michiko Kawasaki, a spokeswoman for Olympus. “We haven’t decided on the specifics on how we’ll handle it.”

SEC to Rewrite Oil-Company Payments Rule Thrown Out by Court

The U.S. Securities and Exchange Commission will rewrite a rule mandating disclosure of payments by oil and gas companies to foreign governments after a federal judge voided an earlier version.

In moving to redraft the rule, the commission decided against appealing U.S. District Judge John Bates’s July 2 opinion, which found the regulation wasn’t consistent with Congress’ directions. Required under the 2010 Dodd-Frank Act, the provision was aimed at enhancing the transparency of payments between oil and gas producers and resource-rich countries.

The SEC will re-propose the rule in a manner “informed by the court’s decision,” John Nester, an SEC spokesman, said today. He said there was no schedule for issuing a new proposal.

The commission approved the rule in August 2012. It was challenged in court by the American Petroleum Institute, which lobbies for oil and gas producers, the U.S. Chamber of Commerce, and two other trade groups.

In rejecting the rule, Bates wrote the SEC erred in deciding that payment-disclosure forms filed by individual companies must be made public.

U.K. Banks Pay Out 500,000 Pounds Over Improper Swap Sales

The U.K. Financial Conduct Authority said banks agreed to pay 500,000 pounds ($779,000) to companies that were improperly sold derivatives to hedge the effect of interest-rate changes.

The amount will increase in the coming months as banks continue to send hundreds of compensation offers to businesses and consumers, the FCA said in a statement on its website today.

British banks may end up paying billions of pounds for improper sales of swaps, according to analysts. It’s one of at least three mis-selling scandals facing U.K. banks. Lenders have also had to pay out billions over payment-protection and identity-theft insurance products.

Royal Bank of Scotland Group Plc has more than 10,000 claims under review, more than the combined total for HSBC Holdings Plc, Barclays Plc (BARC) and Lloyds Banking Group Plc (LLOY), the FCA said. The Edinburgh-based bank may have to increase its 750 million-pound provision for settling swap disputes, Investec Ltd. analyst Ian Gordon said in a note to clients.

“We are committed to ensuring that all those that were mis-sold these products get fair and reasonable redress,” RBS said in an e-mailed statement. “We are prioritizing those businesses that are most in distress first, and working towards processing the majority of cases within the timeframe set by the regulator.”

Groups representing businesses that bought the interest-rate products said the process wasn’t moving fast enough. The FCA report is “depressing” because it shows that only 10 companies out of 15,000 claims have been offered compensation, said John Allan, chairman of the Federation of Small Businesses.

The British Bankers’ Association said the FCA report indicates that financial institutions have been working to contact all parties potentially affected by the swap sales.

U.S. Banking Agencies Release Template for Bank ‘Living Wills’

U.S. regulators released a template to guide mid-sized banks in writing initial plans designed to liquidate themselves with minimal disruption in a failure.

The template from the Federal Reserve and Federal Deposit Insurance Corp. is meant to help banks with total consolidated assets between $50 billion and $100 billion in filing their opening round of “living wills” by a Dec. 31 deadline.

The banks -- thought less likely to be a threat to the wider financial system were they to collapse -- will write tailored resolution plans that focus on nonbank operations, the agencies said.

Dealers in Debt Pare Commitments Raising Risk as Rules Bite

The worst losses in U.S. debt in at least 37 years are being magnified by investors exiting the market at the same time new regulations prompt Wall Street firms to cut back on trading corporate bonds.

Bank of America (BAC:US) Merrill Lynch’s U.S. Broad Market Index is on pace to drop 4.41 percent, the biggest annual loss since at least 1976. Investors pulled $123 billion from bond funds since May, according to TrimTabs Investment Research.

Trading in corporate fixed-income securities is the lowest ever as a proportion of outstanding debt, and volumes in Treasuries are little changed from 2007 levels even though the market has almost tripled to $11.5 trillion, Financial Industry Regulatory Authority and ICAP Plc data show. Bonds are getting riskier even with inflation at bay and corporate profits hitting new highs.

Investors say it’s becoming harder to quickly exit positions as banks cut inventories and curb riskier businesses such as trading with their own money to comply with rules from the Basel Committee on Banking Supervision and the U.S. Dodd-Frank Act.

Money managers who used an average of seven dealers for the biggest purchases and sales of investment-grade securities in 2009 now say they need nine or 10, according to Stamford, Connecticut-based financial advisory firm Greenwich Associates.

The credit-default swaps market has contracted, reflecting reduced trading, according to data maintained by the Depository Trust & Clearing Corp.

The shrinking derivatives market makes it more difficult for dealers to hedge, reducing their willingness to own bonds, according to Jeff Meli, the co-head of fixed-income, currencies and commodities research at Barclays Plc in New York.

Banks are setting aside more money to cover bad loans and cope with downturns to comply with rules aimed at preventing U.S. taxpayers from having to bail them out as during the credit crisis.

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Interviews

Levitt Says Bank Regulators Are Taking Aim at JPM

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, said JPMorgan Chase & Co. faces a “spate of international regulatory actions.” Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Barnier Says Opposed to ‘Brutal’ Ban on Fixed Price Money Funds

Michel Barnier, the European Union’s financial services chief, said he opposed calls for a “formal and brutal ban” on fixed share price money funds that some blame for worsening the financial crisis after the collapse of Lehman Brothers Holdings Inc.

Barnier made proposals today that sought to rein in the funds, falling short of such a ban.

Comings and Goings/Executive Pay

Ecobank’s Tanoh to Forgo 2012 Bonus as Bank Reviews Governance

Ecobank Transnational Inc. (ETI) Chief Executive Officer Thierry Tanoh will forgo a $1.14 million bonus for 2012 as the lender reviews corporate governance after allegations of fraud by a senior manager.

Executive Director of Risk and Finance Laurence do Rego will meet the board next week about fraud allegations she made to Nigeria’s Securities and Exchange Commission last month, Jeremy Reynolds, a spokesman for Lomo, Togo-based Ecobank, said by e-mail yesterday. Do Rego said she had been pressured to write off debts owed by a business chaired by Ecobank Chairman Kolapo Lawson and manipulate the bank’s results for 2012.

The bank, which operates in more African countries than any other, will appoint external advisers to review governance, Reynolds said. While the bank doesn’t agree with Do Rego’s allegations, she has the opportunity to present her evidence to the board, he said.

Do Rego isn’t attending work at Ecobank while the bank investigates a possible misstatement of her qualifications made when she joined 11 years ago, Reynolds said. Do Rego said she didn’t lie about her qualifications, the Financial Times reported on Aug. 29.

Israeli Banks Delay Salary Discussion at Regulator’s Request

Bank Leumi (LUMI) Le-Israel delayed salary discussion, following a regulator’s request, until a new directive on banking management is finalized, according to a filing with the Tel Aviv Stock Exchange yesterday.

Last month, the Israel banks supervisor issued a draft directive on compensation.

The Bank Leumi discussion was scheduled to be held at its annual shareholders meeting on Sept. 12, the bank said in the filing.

Bank Hapoalim (POLI) Ltd., Israel’s largest bank, and First International Bank (FTIN) of Israel Ltd. also delayed salary discussions at the regulator’s request, according to filings with the Tel Aviv Stock Exchange.

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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