Virginia ‘Set-Aside’, EU Share Trading Data, Bank Liquidity: Compliance

Virginia Governor Robert McDonnell’s proposal to set aside $30 million to offset the impact of any federal budget cuts is a positive step toward keeping the state’s AAA credit rating, Moody’s Investors Service said.

Virginia, which receives the most federal funding per capita after Alaska, is among five states that Moody’s said could lose top bond rankings because of their reliance on U.S. money.

On Aug. 18, McDonnell proposed using part of the state’s $545 million budget surplus to mitigate any spending cuts proposed by Congress. A committee of Democrats and Republicans is charged with shaving $1.5 trillion from the federal budget over the next decade.

Lisa Heller, a Moody’s analyst, wrote in the rating company’s weekly outlook that the fund, a “part of the governor’s strategy to counteract anticipated reductions in federal spending, would be credit positive for the state.”

Compliance Policy

EU May Force Clearing Houses to Share Trading Data

The European Union may require exchanges to share information with clearing houses operated by rival companies to remove “commercial barriers” that hinder competition for handling trades.

Trading venues should provide data access on a “transparent and non-discriminatory basis,” according to a document obtained by Bloomberg News. Banks and trading facilities would also have to publicize “bid and offer prices and the depth of trading interests” for bonds and derivatives, to increase transparency in markets that were previously subject to fewer regulations, according to the European Commission document.

The measures are part of a wider overhaul by the commission, the 27-nation EU’s executive arm, of trading rules for financial markets following the 2008 contraction in the credit markets that followed the collapse of Lehman Brothers Holdings Inc. (LEHMQ) The commission has also sought to curb naked short-selling and trading in non-standardized derivatives.

The proposals “would prohibit discriminatory practices and prevent barriers that may prevent competition for the clearing of financial instruments,” according to the document dated Aug. 18. Greater competition would “lower investment and borrowing costs.”

The commission declined to comment.

Clearinghouses operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the risk of a trader defaulting. The business is becoming more valuable amid tougher derivatives trading regulation and a merger wave that has seen more than $20 billion of exchange takeovers announced in the past seven months.

Canada Official Says G-20 Close on Final Rules for Big Banks

Group of 20 countries are close to agreeing on new international rules for the world’s systemically important banks, a Canadian finance department official said.

The official spoke to reporters yesterday on condition he not be identified.

European Banks Under Assault in Markets Reminiscent of 2008

Three years after the collapse of Lehman Brothers Holdings Inc., financial shares in Europe are under assault, the cost of insuring bank debt is at records, and bankers see worrying parallels to that time.

A Bloomberg index of European financial stocks fell as much as 2.9 percent to the lowest level since March 2009, while a measure of banks’ reluctance to lend to each other was at the highest since April of that same year.

The chief executive officer of Deutsche Bank AG (DBK), Josef Ackermann, said Sept. 5 market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression. Investors have driven yields higher on the bonds of Greece, Portugal, Spain and Italy on doubts Europe’s leaders will be able to stop the sovereign debt contagion.

The disarray in financial markets will raise pressure on finance ministers and central bankers from the Group of Seven nations to take further steps when they meet in Marseille, France, on Sept. 9 and 10.

The collapse of New York-based Lehman Brothers froze credit markets and forced taxpayer-funded bailouts of banks from Washington and London to Berlin. At that time, the concern was over U.S. mortgage-backed securities. This time, it’s about the bonds of Europe’s debt-ridden governments.

Many European banks “obviously” wouldn’t be able to shoulder writedowns on sovereign debt held in their banking books based on market values, Ackermann said.

For more, click here.

Basel Group Weighs ‘Unintended Consequences’ of Rules

Global bank regulators are examining planned liquidity rules to guard against possible “unintended consequences” of the measures designed to protect lenders from another credit crunch.

The Basel Committee on Banking Supervision has started a second study into the likely impact of the liquidity rules and asked banks to submit data to national supervisors to help assess whether they should be revised, said Stefan Walter, the secretary general of the group. The results will be given to national watchdogs in the first quarter of 2012, he said.

The liquidity rules, which include requiring banks to hold enough easily saleable assets to survive a 30-day credit crunch, and to have minimum amounts of long-term stable funding, are part of the last year’s Basel III deal to bolster the defenses of the world’s financial system. At the end of 2009, lenders had a 1.73 trillion-euro ($2.45 trillion) gap in the assets necessary to meet one of the measures known as the liquidity coverage ratio, LCR, according to an earlier Basel impact study published in December.

The requirements have triggered unease among some banks and regulators, which have warned that the range of assets that can be used to satisfy the LCR is too narrow and overly focused on government bonds.

The Basel committee said in December that it would conduct an “observation period” on the rule until mid-2013 and address “unintended consequences as necessary.” The LCR is scheduled to enter into force on Jan. 1, 2015.

For more, click here.

Danish Mortgage Group Warns on Liquidity Caps During Crisis

Denmark’s mortgage bankers group, which represents Europe’s biggest covered-bond market backed by home loans, said plans to impose liquidity rules will exacerbate financial market turmoil amid signs the worst crisis since the Great Depression is far from over.

Denmark has fought to change rules set by the Basel Committee on Banking Supervision that it says would penalize the country’s $470 billion mortgage-bond market. In July, the European Union agreed to ease Basel’s stance and base liquidity assessments on tests instead of an asset’s class. Basel had assigned sovereign debt a higher liquidity status than non- government bonds. The rules are due to be implemented by 2015.

That may be too early. Denmark’s Local Bankers Group has warned that the country’s financial crisis could last another four years as government efforts to avert further insolvencies are hampered by elections and Scandinavia’s slowest economic recovery. Banks already face a liquidity squeeze as they approach a 2013 expiry date on government bond guarantees, the group’s Chairman Bent Naur said in an interview last month.

The chief executive officer of Deutsche Bank AG, Josef Ackermann, said this week that market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of that year’s crisis.

For more, click here, and see Basel bank liquidity story, above.

Republicans Vow Opposition to U.S. Consumer Bureau Nomination

Senate Republicans hearing testimony from President Barack Obama’s nominee to head the Consumer Financial Protection Bureau said they wouldn’t confirm anyone to run the agency without changes to its structure.

Republicans have a “substantive disagreement” about how the bureau functions under the Dodd-Frank financial regulatory overhaul, said Senator Richard Shelby, the top Republican on the Senate Banking Committee, reiterating his opposition to the nomination of Richard Cordray.

Forty-four Republican senators have vowed to block a nominee unless the bureau is restructured to remedy what they call a lack of accountability. The changes they are demanding include the replacement of the director with a five-member commission.

In the 100-member Senate, nominees generally need 60 votes for confirmation.

Senator Tim Johnson, the South Dakota Democrat who chairs the banking panel, accused Republicans of doing the bidding of banks who lobbied against the agency’s creation.

For more, click here.

Compliance Action

Banks Cut Estimate for Funding Need After Rules Are Delayed

A bank lobbying group cut its estimate of financial institutions’ funding needs in the next four years by 85 percent after global regulators postponed implementation of new rules and lending declined.

Banks worldwide will have to sell $816 billion of additional long-term debt through 2015, according to a study released by the Institute of International Finance in Washington. That compares with the organization’s June 2010 estimate of $5.4 trillion.

The Basel Committee on Banking Supervision, under pressure from European and U.S. banks, delayed the effective date of a long-term liquidity standard until 2018.

The liquidity rules didn’t exist until regulators and central bankers from 27 nations that make up the Basel committee completed them in December. The short-term standard requires banks to have enough cash or easily cashable assets to meet debt coming due in a month and the long-term rule aims to ensure funding needs for the next 12 months are met through assets that can be sold quickly.

The institute, whose 440 members include the world’s largest banks, tweaked its estimate of the regulatory impact on global growth. Tighter capital standards by the Basel committee, as well as banking reforms passed in the U.S., U.K. and other nations, will reduce gross domestic product by 3.2 percent in the U.S., euro region and Japan by 2015, the institute said. Its estimate last year was 3.1 percent.

For more, click here.

Deutsche Boerse-NYSE Deal Flouts German Rules, Professor Says

Deutsche Boerse AG (DB1) and NYSE Euronext’s plan to merge conflicts with German exchange rules and local authorities should block the deal as a result, according to the author of a legal opinion published yesterday.

Control and profit transfer agreements to create the world’s largest owner of equities and derivatives markets are at odds with Deutsche Boerse’s duty to operate the Frankfurt Stock Exchange, a report by Ulrich Burgard, a professor of business law at the Otto-von-Guericke University of Magdeburg, found.

“The Exchange Supervisory Authority of the State of Hesse therefore has no choice: It must prohibit the merger,” Burgard said at a press conference in Frankfurt, where he presented his findings. The report was backed by Johannes Witt, who represents the workers council on Deutsche Boerse’s supervisory board and who called the press conference.

Witt last week called on German regulators to scrutinize Deutsche Boerse’s takeover of NYSE Euronext (NYX), urging Hesse’s Economy Ministry to evaluate the plan and saying it will damage Frankfurt as a financial center. Deutsche Boerse is based in the nearby town of Eschborn and needs approval for the merger from the State of Hesse, which oversees the Frankfurt bourse and grants the company its exchange licenses.

Deutsche Boerse, in an e-mailed response, said it “took note” of the report and expects European Union antitrust authorities to approve the merger at the end of the year.

For more, click here.

Georgia Commerce Buys Lenders as Failure Tally Climbs to 70

Georgia Commerce Bank, the Atlanta-based firm that caters to small businesses, purchased two failed lenders as the tally of U.S. closures this year rose to 70.

Georgia banking officials closed Woodstock-based CreekSide Bank and Patriot Bank of Georgia in Cumming, the Federal Deposit Insurance Corp. said Sept. 2 on its website. The two failures, the 18th and 19th in the state this year, cost the deposit- insurance fund $71.7 million.

Banks are closing under stress from commercial real estate loans, tied to property values that fell about 49 percent from the October 2007 peak through April, according to Moody’s Investors Service. Regulators have shuttered more than 390 lenders since the start of 2008, FDIC data show.

Georgia Commerce picked up almost $208 million in deposits, more than $250 million in assets and three branches, the FDIC said.

For a table listing banks that have failed since 1934 and their cost since 1986 in millions of dollars to the Deposit Insurance Fund, click here. The data on the table is provided by the FDIC.

Dutch Regulator Opta Starts Probe Into DigiNotar Certificates

Dutch telecommunications regulator Opta started an investigation into the reliability of safety certificates of Internet-safety company DigiNotar BV, Harriet Garvelink, a spokeswoman for Opta, said by telephone yesterday.

The Dutch government said Sept. 3 it no longer trusts certificates issued by DigiNotar, a unit of Oakbrook Terrace, Illinois-based VASCO Data Security International Inc. (VDSI), after an attack by hackers.

SEC Seeking Comment on Rewriting Obsolete, Burdensome Rules

The U.S. Securities and Exchange Commission is seeking comments on how it should review its securities rules in response to a presidential order that agencies deal with outmoded or unnecessarily burdensome regulations.

The SEC has opened a one-month public comment period “on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process,” the agency said in a statement yesterday. The SEC said in its request that it isn’t looking for advice on specific rules.

President Barack Obama issued a July 11 executive order calling for independent agencies like the SEC to “consider how best to promote retrospective analysis of rules” that may be ineffective or burdensome.

Courts

Ex-AOL Finance Chief Kelly Settles SEC Suit for $260,000

Former AOL Inc. (AOL) finance chief John Michael Kelly agreed to pay $260,000 to settle a U.S. Securities and Exchange Commission lawsuit claiming he helped overstate Internet advertising revenue at the company.

The SEC sued eight former AOL executives in 2008, including Kelly and another former chief financial officer, Joseph Ripp, claiming they helped inflate revenue at the company by more than $1 billion from 2000 to 2002.

In a judgment signed by U.S. District Judge Colleen McMahon in Manhattan yesterday, Kelly agreed to turn over $200,000 in profits he allegedly made from the scheme and pay a $60,000 penalty. Kelly didn’t admit or deny the allegations in agreeing to settle.

AOL agreed in 2005 to pay $300 million to settle a related investigation.

The case is Securities and Exchange Commission v. Kelly, 08-CV-4612, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Speeches

Staley Says Banks Need ‘Harmonized’ Regulatory Framework

James Staley, head of investment banking at JPMorgan Chase & Co. (JPM), spoke at a conference in Frankfurt about banking regulation, compensation and risk processes.

For more, click here.

Japan’s Regulator to Cooperate With Ministries, Jimi Says

Japan’s financial regulator will cooperate with the country’s relevant ministries to monitor the market amid concerns about Europe’s sovereign debt crisis, said Financial Services Agency Minister Shozaburo Jimi.

“Japan’s financial system is relatively strong and stable,” said Jimi, speaking to the press in Tokyo yesterday. “We will monitor closely the global impact on Japan’s financial system.”

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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