CFTC Rules, Hedge Compromise, OTC Curbs: Compliance

The Commodity Futures Trading Commission moved to restrict what brokers can do with clients’ assets after investments in money-market mutual funds and government-sponsored entities soured during the global financial crisis.

CFTC commissioners voted 4-1 yesterday to propose limiting investments in money-market funds to 10 percent of client assets and investments in GSE securities to 50 percent. The rule would stiffen restrictions on what brokers can do with customer money, or margin, used to back futures contracts.

The commission will take public comment on the proposal before staff members make any changes. The rule requires a second vote by CFTC commissioners to become binding.

Compliance Policy

EU Reaches Compromise on Regulations for Hedge Funds

Hedge-fund and private-equity regulations that will restrict bonuses and require increased disclosure were approved by European Union negotiators representing the European Parliament and 27 member states.

The accord will allow the rules for hedge-fund managers to become part of EU law as soon as next year.

Finance ministers from the EU agreed on a compromise at a meeting in Luxembourg last week to give the European Securities and Markets Authority powers over a so-called passport system for non-EU hedge-fund managers. The Brussels-based European Commission proposed the rules last year.

The passport would give managers access to investors across the EU with a single registration, in return for complying with transparency rules.

Private-equity managers will face tougher rules on asset stripping as part of the law, which also place limits on the sale of assets immediately following a corporate takeover and impose requirements on private investors. The rules stop short of preventing hedge funds based outside the EU without a passport from taking EU investors’ money.

OTC Derivatives May Face Curbs, Call for Swap Data

Regulators should consider limiting trades in some derivatives that aren’t centrally cleared in a bid to cut excessive risk, the Financial Stability Board said, according to an Oct. 25 report on the over-the-counter derivatives market.

The Dodd-Frank Act, signed into law by President Barack Obama in July, mandates that most interest-rate, credit-default and other swaps be processed by central counterparties and traded on exchanges or similar systems.

Restrictions may be needed to enforce an accord by the Group of 20 countries that require central clearing of standardized OTC derivative contracts by the end of 2012, the FSB said.

G-20 nations have sought to limit over-the-counter derivatives, including credit-default swaps, saying the trading of them helped fuel the financial crisis. Establishing clearinghouses and transparent trading systems are the main components of the new rules. The U.S. and 27-nation European Union have proposed measures to limit derivative-trading risks.

Global regulators should work to increase the types of derivative contracts that are standardized and required to go through clearinghouses, the FSB said. Coercion should be reserved for derivatives that are “suitable” for clearing.

Separately, derivatives clearinghouses would have to provide data on swaps prices, fees and the size of the market when seeking approval from U.S. commodity regulators to clear a contract, under a proposal scheduled to be discussed yesterday by the Commodity Futures Trading Commission.

The guidelines are part of a rule the CFTC must issue as a result of the Dodd-Frank Act, mandating that clearinghouses submit swaps they want to process to the CFTC. The regulator would then decide whether the credit-default, interest-rate or other kinds of swap must be cleared.

The law gives regulators until July 2011 to finish writing rules that will govern how trades in the $615 trillion market are processed after being traded on exchanges or swap-execution facilities.

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Netherlands to Allow Regulator to Sell Troubled Banks’ Assets

Dutch Finance Minister Jan Kees de Jager is preparing a draft bill allowing the country’s central bank to sell assets of troubled lenders and insurers without shareholders’ approval, citing “significant weaknesses” in the financial framework, according to a letter to parliament De Jager wrote in The Hague yesterday. The improvement of the framework for crisis management is a “high priority,” he wrote.

The Dutch central bank, led by Nout Wellink, is in favor of the proposed changes, which would allow it to take control of a troubled financial company and transfer shares, assets or liabilities to another firm or the government without approval from a general meeting of shareholders.

The proposed change “creates an alternative to the financial reorganization option in the emergency procedure, which has proven ineffective,” Wellink wrote in a letter to De Jager dated Oct. 5.

New legislation should prevent companies from canceling contracts with financial institutions that are taken over by the government, as this may frustrate a restructuring, the central bank said.

The Finance Ministry will publish the proposal and seek public feedback next month.

Compliance Action

Aaron’s Inc. Share Surge Triggers Volatility Circuit Breaker

Aaron’s Inc. stock trading was halted yesterday for five minutes following a 12 percent surge that triggered a circuit breaker implemented after the U.S. equity market crash in May.

A series of about 180 trades on different exchanges drove the stock from $20.04 to $22.40 during a single second just before 10:24 a.m. New York time, according to data compiled by Bloomberg. Aaron’s shares retreated after the pause and changed hands for $20.07 at 10:52 a.m., up 13 percent from the Oct. 25 $17.70 closing price.

At its highest level, the stock was trading 27 percent above the Oct. 25 close, data compiled by Bloomberg show.

The move triggered a curb implemented by U.S. exchanges after the May 6 stock market crash erased $862 billion in less than 20 minutes. The pause lasts five minutes for companies in the Standard & Poor’s 500 Index and Russell 1000 Index as well as 344 exchange-traded funds once they rise or fall at least 10 percent within five minutes.

ASX Falls as Lawmakers Oppose Singapore Exchange Bid

ASX Ltd., the owner of Australia’s stock exchange, tumbled the most in 20 months as some of the nation’s lawmakers said they will try to derail its A$8.09 billion ($8 billion) takeover by Singapore Exchange Ltd.

Shares of ASX fell 7.4 percent in Sydney trading after Bob Brown, the leader of the Greens party, said he “will not be facilitating or supporting this takeover.” Opposition treasury spokesman Joe Hockey said the proposal is “of great concern” and independent lawmaker Bob Katter called the plan “lunacy.”

JPMorgan Chase & Co., Credit Suisse Group AG and Deutsche Bank AG cut their investment ratings on Singapore Exchange, citing regulatory issues, increased debt and ASX’s growth outlook.

The takeover requires an amendment to Australia’s Corporations Act to allow the Singapore-based company to own more than 15 percent of ASX, Australia’s treasury department said in an e-mailed statement. The amendment must be lodged in parliament, and lawmakers have 15 days to object, it said.

The transaction also requires approval from Treasurer Wayne Swan under foreign investment rules and signoff from the Australian Securities & Investments Commission, the Monetary Authority of Singapore and both sets of shareholders.

The proposal would also be subject to “extensive regulatory considerations,” because ASX is part of the nation’s financial system, Treasurer Wayne Swan told parliament yesterday.

Apollo Gets SEC Request on Insider-Trading Policies

Apollo Group Inc. received a request from U.S. regulators for information on the education company’s insider-trading policies.

The Securities and Exchange Commission enforcement division asked for the information, Phoenix-based Apollo said in a regulatory filing.

Apollo, the biggest education company by enrollment and operator of the University of Phoenix, disclosed in October 2009 that the SEC was asking about the company’s revenue recognition practices.

Courts

Fed Won’t Join Bank High Court Appeal on Crisis Loans

A group of the largest commercial banks asked the U.S. Supreme Court to let the government continue to withhold details of emergency loans the Federal Reserve made to financial firms in 2008.

The Clearing House Association LLC, a group of the biggest commercial banks filed the appeal yesterday. The Federal Reserve won’t file its own appeal, according to Kit Wheatley, an attorney for the central bank. Under federal rules for appeals, a lower court’s order requiring disclosure remains on hold until the high court acts. David Skidmore, a spokesman for the central bank, didn’t immediately respond to requests for comment.

The bank group is appealing a federal judge’s August 2009 ruling requiring the Fed to disclose records of its emergency lending. Bloomberg LP, the parent company of Bloomberg News, sued for the release of the documents under the Freedom of Information Act.

The central bank has never disclosed the identities of borrowers since the creation in 1914 of its Discount Window lending program, which provides short-term funding to financial institutions, the Clearing House said in its petition.

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Deutsche Bank Ordered to Pay $980,000 in Swap Suit

Deutsche Bank AG, Germany’s biggest bank, was ordered by an appeals court to pay 710,000 euros ($980,000) in damages over swaps it sold to municipalities. The bank plans to appeal.

The Stuttgart Higher Regional Court issued the ruling in a suit brought by a sewer-system operator jointly owned by southern German cities including Ravensburg and Weingarten. The decision overturned most of a lower court ruling that had rejected the claim the bank didn’t properly explain the risk of the swaps, Deutsche Bank attorney Christian Duve said in an interview today.

Deutsche Bank has been involved in more than 20 lawsuits filed by local governments, community-owned utilities and companies that claim the lender sold swaps without adequately disclosing their risks. Four other appeals courts had ruled in favor of Deutsche Bank.

The German case is OLG Stuttgart, 9 U 148/08.

Alliance One Loses Appeal Over Spanish Tobacco Antitrust Fines

Alliance One International Inc. lost a challenge at the European Union’s second-highest court over antitrust fines levied six years ago for fixing the prices paid to Spanish growers for tobacco.

The EU’s General Court today upheld a fine of 1.8 million euros ($2.5 million) levied on Alliance One and a subsidiary by the European Commission for their liability concerning another unit’s involvement in the cartel.

A call to Alliance One in Morrisville, North Carolina, wasn’t answered before office hours.

The case is T-24/05, Alliance One International and Others v Commission, at the European Union General Court.

Prosecutors Ask to Seal Ex-Goldman Programmer’s Trial

The trial of a former Goldman Sachs Group Inc. computer programmer should be held in part behind closed doors to protect the securities firm’s trade secrets, prosecutors said.

The government will introduce evidence at the trial, which is scheduled to start Nov. 29, to show that information Sergey Aleynikov is accused of stealing were Goldman Sachs trade secrets, prosecutors said in a filing yesterday in federal court in Manhattan. Aleynikov’s defense will try to show the information wasn’t secret, prosecutors said.

Prosecutors asked U.S. District Judge Denise Cote to close the courtroom to the public when this evidence is presented.

Aleynikov, who worked as a programmer at Goldman Sachs from May 2007 through June 2009, is accused of copying hundreds of thousands of lines of computer source code related to the firm’s high-frequency trading business on his last day of work. Aleynikov told federal investigators that he intended only to copy “open source” code not owned by Goldman Sachs, according to the prosecutors’ court filing.

Aleynikov’s lawyer, Kevin Marino, declined to comment.

The case is U.S. v. Aleynikov, 10-00096, U.S. District Court, Southern District of New York (Manhattan.)

ArcelorMittal Should Lose Cartel Fine Appeal, Court Aide Says

ArcelorMittal, the world’s largest steelmaker, should lose a challenge to an antitrust fine, an adviser to the European Union’s highest court said.

The fine against three of the company’s units should be upheld, Yves Bot, an advocate general at the EU’s Court of Justice in Luxembourg, said in a non-binding opinion yesterday. He rejected arguments by ArcelorMittal that too much time elapsed between the time of the violation and the antitrust fine. A ruling by the court in line with the advice would be a victory for the European Commission, the 27-nation EU’s antitrust agency, which also filed an appeal.

ArcelorMittal is challenging the decision to re-impose a 10 million-euro ($14 million) cartel fine levied on the units ArcelorMittal International SA, formerly known as TradeArbed SA, ArcelorMittal Luxembourg and ArcelorMittal Belval & Differdange SA, formerly known as Arcelor Profil Luxembourg SA.

Lynn Robbroeckx, a spokeswoman for ArcelorMittal, declined to immediately comment.

The cases are C-201/09 P, ArcelorMittal Luxembourg v. Commission, C-216/09 P, Commission v. ArcelorMittal Luxembourg SA and Others.

Interviews/Speeches

U.K. Must Protect Interests From EU Regulator, LSE Chief Says

The U.K. must “fight” to ensure the country’s business interests aren’t harmed by new European Union regulatory agencies, London Stock Exchange Group Plc Chief Executive Officer Xavier Rolet told British lawmakers yesterday.

The LSE’s Alternative Investment Market for smaller companies is at risk from the establishment of a pan-European securities regulator in Paris, Rolet said. The European Securities and Markets Authority, one of three regulators established by the EU, will have authority over markets starting next year.

The European Commission proposed the new agencies last year as part of an overhaul of European regulation following the worst financial crisis since the Great Depression.

“We are part, whether we like it or not, of a pan-European framework,” Rolet said. At ESMA “we will have 8 percent of the vote even if we represent two-thirds of the financial industry.”

Wolin Says ‘Strides’ Made in U.S. Financial Oversight

Deputy Treasury Secretary Neal Wolin said regulators in the U.S. and overseas are making progress on shoring up financial supervision to prevent future crises.

He made the remarks while speaking on a panel at the Buttonwood Gathering, a two-day financial and economic program sponsored by The Economist, in New York.

Wolin said there is “meaningful global convergence” on how to make derivatives more transparent, along with a “substantial” narrowing of differences between U.S. and European authorities on hedge fund regulation and is moving forward in implementing the Dodd-Frank financial oversight legislation.

“We’ve made very important strides in creating this new framework,” Wolin said.

Sifma’s Ryan Says Banks Straining to Define Prop Trading

Tim Ryan, chief executive officer of the Securities Industry and Financial Markets Association, spoke in Washington yesterday about the difficulty of banks to comply with new regulatory standards, such as the ban on proprietary trading.

Ryan said banks aiming to comply with the so-called Volcker rule are struggling to determine which of their products will remain legal and which must be eliminated.

For the audio, click here and click here.

Comings and Goings

Hedge Fund Overseer to Direct IMF European Department

An economist who oversees a hedge-fund industry standards group in Europe will be named director of the International Monetary Fund’s European department, the Washington-based fund said.

Antonio Borges, who has been chairman of the London-based Hedge Fund Standards Board since its inception in January 2008, will replace Marek Belka of Poland, who left earlier this year to become central bank governor there, the IMF said yesterday in an e-mailed statement. The Portuguese native begins in Washington in late November, according to the release.

The IMF’s European department advises countries on macro- economic and financial sector policies and arranges loans when needed.

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To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: David E. Rovella at drovella@bloomberg.net.

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