Pan-Asian Swaps, Repatriation, Basel Agenda: Compliance

Efforts to encourage clearing of private derivatives through a pan-Asian platform are being thwarted by countries setting up a less efficient patchwork of systems, said Keith Noyes, Asia-Pacific director for the International Swaps and Derivatives Association.

The existence of a patchwork system means Korean-won swaps would have to clear in South Korea, with similar restrictions imposed in India and China, Noyes said. This is “expensive” from a bank’s perspective, according to Noyes, “because it ties up pools of capital in several jurisdictions.”

A nation-by-nation approach would differ from how clearing interest-rate and credit-default swaps is handled in the U.S. and Europe, where multinational trades are made through London and New York. London’s LCH.Clearnet Ltd. is the world’s largest interest-rate swap clearinghouse, while New York-based ICE Trust, a unit of Intercontinental Exchange Inc., is the top backer of credit swaps.

The Group of 20 nations is encouraging greater use of clearinghouses to cut some of the risks of trading in the $583 trillion private derivatives market. Credit-default swaps contributed to the financial crisis and unregulated swaps trades made it difficult to know how interconnected banks had become by trading the contracts.

Clearinghouses operate as central counterparties for every buy and sell order executed by members. Those members post margin and contribute to funds that reduce the effect of default by any single participant. Over-the-counter contracts are privately negotiated between two parties rather than traded on an exchange.

ISDA, based in New York, is the industry and lobbying group for the world’s largest banks and money managers that use swaps.

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Compliance Policy

Carney Says Repatriation Holiday Could Be Part of Tax Reform

The Obama administration would consider letting companies repatriate overseas profits as part of a broader overhaul of corporate tax laws, White House press secretary Jay Carney said.

Carney repeated a stance outlined last month by Treasury Secretary Timothy F. Geithner that giving companies such a tax break won’t be considered outside a comprehensive package of changes to the law.

A “repatriation holiday is something we would consider as part of an overall process,” Carney said.

Obama backs revamping the corporate tax code to lower rates while eliminating many tax breaks.

Chinese Regulator Says Pension Funds Should Increase Investments

China should allow pension funds to invest more money in domestic stock markets as the nation’s economic development fuels companies’ demand for financing, an official at the securities market regulator said.

There’s a large demand for capital, Zhu Congjiu, assistant to the chairman of the China Securities Regulatory Commission, told reporters in Beijing yesterday during the annual National People’s Congress meeting. The current pace of new initial public offerings is reasonable, he said.

Of the 67 new stocks that began trading this year, 18 have slipped below the offering price, according to data compiled by Bloomberg. More than 300 companies raised a record $70.7 billion from IPOs in Shanghai and Shenzhen last year and 54 of those companies are also below their sale price, the data show.

China needs a better plan to direct more capital into the market, Zhu said. The securities regulator aims to make the approval process for corporate bond sales and follow-on stock offerings easier, he said.

The CSRC began reforming its new-equity market in 2009 by abolishing a price-to-earnings ceiling for the IPO price.

Too-Big-to-Fail Capital Rules, CoCos Top Basel Group’s Agenda

The amount global banks must add to their reserves to absorb future financial shocks will be on the agenda when financial regulators meet this week, following a warning from Deutsche Bank AG (DBK)’s top manager that authorities shouldn’t rush to impose more rules.

The Basel Committee on Banking Supervision will also review criteria when it meets today and March 9 to decide which banks should hold the extra reserves, according to the Financial Stability Board, which joins together authorities from the G-20 group of countries. Regulators will examine the potential for using contingent convertible bonds, or CoCos, to meet the rules, said Stefan Walter, the Basel group’s secretary general.

The Group of 20 nations agreed in November that lenders which would threaten the wider financial system if they collapsed should face tougher rules, forcing them to increase their ability to cover losses without failing. The FSB tasked the Basel committee with drafting the global requirements for these systemically important banks. In a progress report to G-20 ministers last month, the FSB said it would get input from the banks on a provisional set of too-big-to-fail measures “during the second half of 2011.”

Borges Says IMF Won’t Need To Be Involved in EU Bank Tests

The International Monetary Fund’s European Department Director Antonio Borges said the fund doesn’t plan to oversee the EU’s new stress tests on banks as the approach will be different from the last reviews.

This year’s exams will be managed by the London-based European Banking Authority after tests in 2010 were criticized for not being stringent enough.

“These new stress tests will be conducted under the guidance or supervision of the new Europe banking authority, which will introduce a different approach from the previous one” and provide credibility, Borges said in Washington yesterday.

EU to Call for Tougher Transparency Rules for Commodity Traders

Commodity derivative markets are opaque and may require tougher rules to curb excessive price volatility according to draft plans set to be approved by European Union governments this week.

Financial-market regulation “where appropriate” may be needed to tackle “excessive price volatility” and the “risk of interruptions or reductions of supplies,” according to a draft statement published on the EU’s website.

The draft report scheduled to be approved by EU ministers on March 10 calls for improved “integrity and transparency of commodity derivatives markets.”

French President Nicolas Sarkozy has blamed speculation for driving up world food prices and made regulation of commodity trading one of his priorities during France’s leadership of the Group of 20 countries in 2011. Michel Barnier, the EU’s financial services chief, and a former minister of Sarkozy’s, called last month for restrictions on traders including position limits.

Sweden Opens Door to CoCos as Banks Face 2013 Buffer Deadline

Sweden’s biggest banks will probably be allowed to use contingent convertible bonds to help them meet capital requirements by 2013 that policy makers say will be among the world’s strictest.

The Basel Committee on Banking Supervision will this week discuss allowing CoCos to count toward additional capital demands for systemically important banks. Oswald Gruebel, the chief executive officer of Switzerland’s biggest lender UBS AG (UBSN), has warned against using contingent convertible bonds to boost capital, arguing regular shareholders may sell their holdings as CoCos dilute stock values upon conversion.

Martin Noreus, deputy director of the banking and securities department at the Swedish Financial Supervisory Authority, said yesterday in an interview in Stockholm that Sweden is following the debate in Europe.

The securities, which convert from debt to equity at a given trigger to contribute to regulatory capital, may bring capital ratios as high as 18 percent, Swedish central bank Governor Stefan Ingves said in a Feb. 1 speech. Finance Minister Anders Borg and Ingves have called for stricter rules in Sweden than elsewhere to stem risk taking. The FSA wants systemically important banks to target total capital ratios of at least 15 percent by 2013.

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EU Lawmakers Vote to Curb Naked Short Selling With Sovereign CDS

European Parliament lawmakers voted to partially ban traders from using credit derivatives to profit from defaults on sovereign debt they don’t own, setting up a possible clash with governments.

The assembly’s economic and monetary affairs committee also voted in Strasbourg, France, in favor of a ban on short selling of stocks or government bonds in the European Union unless traders have at least “located and reserved” in advance the securities they intend to sell.

The lawmakers voted for tougher rules than those under consideration by governments, published on the EU’s website. German Chancellor Angela Merkel banned some types of trading in May last year, as the country sought to stop speculators from fueling the euro area’s debt crisis.

The committee voted to ban traders from using credit- default swaps on European Union nations’ debt, unless they either own the underlying security or other assets whose market price moves in close tandem with it.

The Parliament and governments are discussing changes to proposals in September by the European Commission, the EU’s executive arm.

The commission proposed restricting so-called short selling by requiring traders to submit proof they can access the underlying shares or sovereign bonds to settle a trade designed to profit from falling prices.

Ministers and members of the assembly must approve a final text before the measures can take effect in the 27-nation bloc.

Compliance Action

Southwest Securities Fined $500,000 by Finra Over Muni Advisers

Southwest Securities Inc. will pay $500,000 to resolve Financial Industry Regulatory Authority claims that the firm violated Municipal Securities Rulemaking Board rules by using paid consultants to solicit business.

The unit of Dallas-based SWS Group Inc. (SWS) paid five people, including three former Texas municipal issuer officials, to solicit business on its behalf from October 2006 through April 2009, Finra said yesterday in an e-mail statement. The consultants, who were paid a total of $200,000, helped Southwest obtain 24 securities underwritings and two roles as financial adviser to Texas municipalities, Finra said.

Southwest, which settled the claims without admitting or denying wrongdoing, agreed to have a company officer confirm to Finra that internal compliance systems and procedures are in accordance with MSRB rules and certify that its systems and procedures are reasonably designed to achieve compliance, Finra said.

SEC ‘Capacity Gap’ Risks Oversight Lapses as Targets Multiply

The U.S. Securities and Exchange Commission is about 400 employees short of what it needs to manage its current workload, according to a consultant’s four-month internal review mandated by the Dodd-Frank Act.

The preliminary findings by Boston Consulting Group Inc. reinforce arguments by SEC officials that the agency is underfunded and understaffed as it takes on oversight of derivatives, credit-rating firms and municipal bonds, according to a draft copy of the report obtained by Bloomberg News.

The study said staffing levels had declined since 2005 and that SEC employees interviewed consistently complained their departments were understaffed. The “capacity gap” of 375 to 425 employees identified in the report could be partially offset by shifting managers down to front-line or support roles, it suggested. The SEC could also resort to a large influx of temporary workers, the report said.

SEC Chairman Mary Schapiro said in Feb. 17 testimony to the Senate Banking Committee that her agency needs a larger budget and eventually 800 more workers to implement the regulatory demands of Dodd-Frank, the law signed by President Barack Obama in July.

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Treasury Software to Enforce ‘Do Not Pay’ List at Agencies

The U.S. Treasury Department will meet this month with companies that can develop software to help detect improper payments to contractors and other recipients of federal money, according to an online notice.

The department will host “vendor days” March 21 and 22 in Washington, according to the March 4 notice. Interested companies will be selected to demonstrate software that could give federal agencies a single portal to check eligibility before sending checks for services or for government benefits, including Medicaid and unemployment insurance. Responses are due March 15.

The software that Treasury plans to buy would be used by other arms of the government to search federal databases, according to a Department of Management and Budget memorandum sent by President Barack Obama to executive department leaders in June.

Courts

Connecticut Hedge Fund Manager Pleads Guilty to Fraud

Francisco Illarramendi, a hedge fund manager in Connecticut, pleaded guilty to fraud and two other men were charged with conspiracy in a U.S. probe of an alleged Ponzi scheme with potential investor and creditor losses of hundreds of millions of dollars, prosecutors said.

Illarramendi, 42, pleaded guilty yesterday in federal court in Bridgeport to two counts of wire fraud and one count each of securities fraud, investment-adviser fraud and conspiracy to obstruct justice, said U.S. Attorney David Fein in Connecticut in an e-mailed statement.

The plea couldn’t be confirmed immediately in electronic court records. John Gleason, an attorney for Illarramendi, declined to comment.

The SEC case is SEC v. Illarramendi, 11-78, U.S. District Court, District of Connecticut (New Haven).

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Interviews/Speeches

Bank Stress Tests Will Also Be Exam for EU Supervisor, Rehn Says

Stress tests on banks in the European Union will also be an “important” examination of the region’s revamped system of financial supervisors, said the EU’s economics chief.

The next round of bank stress tests “will be a very important litmus test for this new European architecture of financial regulation and supervision,” Olli Rehn, the EU’s economic and monetary affairs commissioner.

He made the remarks in a speech in Luxembourg yesterday.

“Due to the lack of any kind of effective European level supervision, there was a certain variety of implementation in the member states” in last year’s exercise, Rehn said.

The 2010 stress tests were criticized for not being stringent enough because lenders in the 27-nation region were shown by regulators to need only 3.5 billion euros ($4.9 billion) of new capital, about a 10th of the lowest analyst estimate. This year’s exams will be managed by the London-based European Banking Authority.

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CFTC ‘Out of Step’ With SEC on Dodd-Frank Rules, Sommers Says

The Commodity Futures Trading Commission is “out of step” with U.S. and international efforts to write rules for the derivatives market, Commissioner Jill Sommers told bankers at a conference in Washington.

CFTC and Securities and Exchange Commission proposals for governing new swap-execution facilities may lead to inconsistent regulation, Sommers said yesterday in a speech at the Institute of International Bankers annual conference in the U.S. capital.

In December, the CFTC proposed allowing participants in the swap-execution facilities to request price quotes from a minimum of five possible sellers. The SEC on Feb. 2 proposed a rule that would allow buyers to request a quote from a single seller. The CFTC measure is “overly restrictive” and doesn’t provide the same flexibility as the SEC proposal, said Sommers, one of two Republicans among the CFTC’s five commissioners.

Sommers was the only commissioner to oppose the CFTC proposal in a 4-1 vote to seek comment.

The CFTC and the SEC are leading U.S. efforts to write derivatives regulations required under the Dodd-Frank Act.

Former SEC Head Levitt Gives Dodd-Frank Law ‘C Minus’

Former U.S. Securities and Exchange Commission Chairman Arthur Levitt said Congress is “eating away at whatever Dodd- Frank put on the table.”

Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

Nobelist Yunus Says Bangladesh Threatens Grameen Bank’s Autonomy

Muhammad Yunus, the Nobel Prize-winning microfinance pioneer, said Bangladesh’s government is trying to oust him as managing director of Grameen Bank in an attempt to take control of the institution.

Yunus made the remarks via video link yesterday while attending a microcredit conference in Washington.

A Bangladesh court yesterday delayed a decision on a petition filed by Yunus, 70, aiming to block his removal, lawyer Kamal Hossain said in a telephone interview from Dhaka. Bangladesh’s central bank, which is also the country’s financial regulator, sought to relieve Yunus of his duties, citing non- compliance with its rules, the Financial Times reported on March 3.

Yunus, who founded Grameen, breached Bangladesh retirement norms by continuing to head the lender beyond age 60, K.M. Abdul Wadood, general manager for banking regulation and policy at the central bank, said on March 1.

Grameen Bank provides credit to the poorest of the poor in rural Bangladesh without any collateral.

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Harman International Says Director Gupta Resigns From Board

Harman International Industries Inc. (HAR) director Rajat Gupta has resigned from the board, Jean Lepine, Harman’s vice president of corporate affairs, said yesterday in an interview.

Gupta, the former worldwide director of consultant McKinsey & Co., was accused last week by the U.S. Securities and Exchange Commission of providing insider tips on companies including Goldman Sachs Group Inc. (GS) and Procter & Gamble Co. (PG) to the billionaire hedge-fund manager Raj Rajaratnam.

Earlier in the day, Gupta had resigned from the boards of AMR Corp. (AMR) and Genpact Ltd. (G) The information was disclosed in regulatory filings. Gupta, 62, last week also resigned as a director of Procter & Gamble.

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 Rovella at drovella@bloomberg.net.

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