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Hacker Threats, Solvency II, Philippine Bonds: Compliance

Publicly traded companies should disclose real or potential cyber attacks capable of disrupting business operations or financial stability, the U.S. Securities and Exchange Commission said.

Under guidance issued Oct. 13 by the agency’s division of corporation finance, the SEC said financial statements should address the threat posed by hackers if a network breach is “reasonably likely” to have a material effect on a company, including the theft of intellectual property or increased security costs.

Data breaches at Sony Corp. (6758), Citigroup Inc. (C) and other companies have sharpened U.S. government scrutiny of how businesses safeguard consumer information and respond to cyber attacks. The Obama administration on May 12 sent Congress a proposal that called for shielding banks, power grids and government computers, creating a uniform data-breach notification law and requiring owners of critical systems to develop network-security plans.

A House Republican task force released recommendations that emphasize voluntary industry incentives. Senate Majority Leader Harry Reid, a Nevada Democrat, is compiling comprehensive cybersecurity legislation.

In its guidance, the SEC recognized concerns about giving hackers too much public information through “detailed disclosures,” and said such disclosures are not required under federal securities law. The agency also cautioned companies to avoid generic “boilerplate” disclosures and instead provide “sufficient” information to allow investors to appreciate the risks involved.

SEC spokesman John Nester declined to comment beyond the agency’s guidance.

Compliance Policy

EU Markets Rules to Curb Commodity Swaps, High-Frequency Traders

The European Union may impose position limits for commodities derivatives and curbs on high-frequency trading as part of plans to overhaul the region’s financial-market rules.

The European Commission, the 27-nation EU’s executive arm, is seeking limits on the number of commodity derivative contracts “any given market members or participants can enter into over a specified period of time, or alternative arrangements” with the same impact, according to copies of proposals set for release on Oct. 20 that were obtained by Bloomberg News.

French President Nicolas Sarkozy has demanded steps to curb commodity derivatives speculation, which he blames for driving up world food prices. He has made the issue a priority of France’s presidency this year of the Group of 20 nations.

High-frequency trading firms would be forced to better manage their risk and will be banned from some practices under this week’s proposals, which will also include draft laws toughening market-abuse sanctions.

Under the plans for commodity derivatives, the EU would have the power to set the same position limits across the entire region if it felt that curbs put in place by national regulators were not working. The rules would help tackle “excessive” price volatility for commodities, according to the EU documents.

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Basics of Basel Liquidity Rules ‘Unlikely to Change,’ BIS Says

Jaime Caruana, general manager of the Bank for International Settlements, said that the “basic design and structure” of two liquidity rules drafted by Basel regulators are “unlikely to change.”

A review of the measures is meant to “ensure that the rules work as intended and that any unintended consequences will be addressed,” he said in prepared remarks for an Oct. 14 Lisbon speech.

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. The measures were designed by the Basel Committee on Banking Supervision, which is part of the BIS.

Europe Crisis Plan Wins Global Backing as G-20 Urges Action

European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Europe’s revamped strategy to beat its two-year sovereign debt crisis won the backing of global finance chiefs, who urged the region’s leaders to deal “decisively” with the turmoil when they meet for emergency talks in a week’s time.

European officials on Oct. 14 outlined the initiatives they’re considering at a meeting in Paris of finance ministers and central bankers from the Group of 20 economies. With the continent’s fiscal woes rattling financial markets and threatening the world economy, governments were urged to complete the plan at their Oct. 23 summit in Brussels and to tame the threat of contagion by maximizing the firepower of their 440 billion-euro ($611 billion) bailout fund.

Policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender needs a fillip of cash.

Europe’s strategy, which is yet to be made public, currently includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and multiplying the strength of the newly-enhanced European Financial Stability Facility, people familiar with the matter said Oct. 14.

The G-20 officials -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- said the world economy faces “heightened tensions and significant downside risks” that must be addressed.

They vowed to keep banks capitalized and financial markets stable, while reiterating an aversion to excess currency volatility. They also considered shortly naming as many as 50 banks as systemically important, two officials said.

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EU Publishes Draft Tender Rules for Carbon Auctioning Platform

The European Union’s regulatory arm published Oct. 14 draft specifications for the planned purchase of auctioning infrastructure under the EU emissions trading system.

Isaac Valero-Ladron, climate spokesman for the European Commission, said in an e-mail that the commission is “on track” to start the auction in the second half of 2012. It intends to launch tender procedures and the single auction monitor “around the turn of the year,” he said.

EU nations approved in July a proposal by the commission to auction 120 million tons of post-2012 permits in the second half of next year to limit price shocks as the bloc phases out free allowances. In 2013, the EU will auction about 60 percent of all CO2 and that proportion will increase in coming years.

U.K. Bank Group Attacks Blocking of ‘Liquidity Swaps’, FT Says

The British Bankers’ Association described as “inappropriate” the Financial Services Authority’s approach to so-called liquidity swaps, some of which have been blocked while the FSA weighs their effect, the Financial Times reported, citing the banking body’s submission to the watchdog on the issue.

The BBA said liquidity swaps had real benefits to the economy and that existing management and governance serve adequately to mitigate relevant risks, the newspaper said.

The FSA is concerned about potential effects on financial stability, the FT reported.

Compliance Action

Rizal Bank Asks Philippine Court to Review Tax Agency Bond Rule

Rizal Commercial Banking Corp. (RCB) said it asked a Philippine court yesterday to review a government order that seeks to impose a 20 percent tax on bonds sold in 2001 that were supposed to be exempt from the levy.

Rizal is “questioning the propriety and legality” of a Bureau of Internal Revenue ruling this month that a final withholding tax is applicable on 35 billion pesos ($808 million) of government bonds due Oct. 18, Macel Fernandez Estavillo, the bank’s head of legal and regulatory affairs, said in a telephone interview Oct. 14 from Manila. The ruling is in breach of contract, she said.

The government will generate almost 5 billion pesos in revenue from the levy, the tax agency estimated more than a week ago.

The Bankers Association of the Philippines, which represents the nation’s 36 commercial lenders, is seeking a dialog with the government to discuss the issue, Nestor Tan, head of the association’s tax committee, said by telephone.

The internal revenue agency on Oct. 7 said that the 20 percent tax on the bonds will be deducted by the Bureau of the Treasury at the time of redemption. The bonds weren’t subject to a withholding tax, according to a term sheet distributed to investors when the debt was issued in 2001.

Banks May Shun $231 Billion Rollover of U.S. Emergency Loans

Bank of America Corp. (BAC) and Citigroup Inc. are among firms planning to repay rather than roll over their share of $231 billion raised under a U.S. loan program meant to help the economy as the business slowdown crimps demand for credit.

Lenders including General Electric Co. (GE) and JPMorgan Chase & Co. (JPM) face deadlines to refinance or repay by the end of 2012, when funds borrowed under the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program mature. The emergency program provided U.S. guarantees to help banks raise money after credit markets froze in the 2008 financial crisis.

While lawmakers are urging lenders to help create jobs, loan demand is slack and bulging deposits mean banks don’t need to hang on to cash received when they sold the U.S.-backed debt. The program permitted firms to raise money during the financial crisis by selling debt securities guaranteed by the FDIC. This allowed banks to borrow at close to the same interest rates as the U.S. Treasury.

Liquidity is no longer an issue and bankers could raise the $231 billion quickly if they wanted, according to Tom Farina, a managing director at Deutsche Insurance Asset Management in New York, which oversees more than $200 billion. There’s no apparent strain because banks have been hoarding cash rather than lending aggressively, Farina said.

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EU Rules May Increase Appeal of Insurer Subordinated Bonds

European insurers, including Axa SA (CS) and Allianz SE (ALV), may redeem subordinated bonds depressed by the region’s debt crisis because they won’t qualify as core capital under rules being introduced in 2013, investors say.

The European Union will introduce Solvency II rules from 2013 in a bid to align insurers’ risks with capital to offer more protection to policyholders. There may be a transition period for bonds that won’t count as core capital under the new regulations. Some notes sold by insurers such as Axa and Assicurazioni Generali SpA (G) have slumped amid concern over holdings of debt from peripheral EU countries.

Even if Solvency II leads to more redemptions, it won’t mean insurers will follow some European banks in buying back bonds before their call date, said Narciso Quijano, head of fixed income investments at Munich-based BayernInvest.

In case of bankruptcy, subordinated bonds are only repaid after policyholders and senior debt holders. Some notes also allow the issuer to stop paying interest or reduce the principal if the company’s solvency is threatened or if it’s unprofitable.

European insurers have already started redeeming subordinated bonds.

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Olympus Adviser Payments Should Be Probed, PWC Report Says

Olympus Corp. (7733) may face regulatory and legal scrutiny because of payments made to advisers in a 2008 transaction, according to a PricewaterhouseCoopers report commissioned by ousted president Michael C. Woodford.

Potential offenses include false accounting, financial assistance and breaches of duties by the board, according to an Oct. 11 report that Woodford provided to Bloomberg News. Chairman Tsuyoshi Kikukawa said at an Oct. 14 press conference that the board fired Woodford, a 30-year veteran of the Japanese company, because he “wouldn’t listen” to warnings from Kikukawa. The British executive, who is now back in the U.K., said he was fired after he challenged the transactions.

Olympus, a maker of cameras and medical equipment, paid $687 million to two advisory companies related to its purchase of Gyrus Group Plc in 2008, the report said. The fees were more than a third of the $2 billion purchase price, according to the report.

Kikukawa didn’t respond to an e-mail seeking comment and the company declined to make him available.

Olympus Executive Vice President Hisashi Mori said the report “is based on speculation,” when asked about it in a telephone interview yesterday. Further calls to Mori today weren’t answered.

PricewaterhouseCoopers spokesman Derek Nash said he “could neither confirm or deny” that the firm had done any work for Olympus.

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Courts

Rajaratnam May Join Madoff, Blind Sheikh in Federal Prison

Raj Rajaratnam, the hedge fund manager given the longest sentence for insider trading, may serve that time at a North Carolina prison whose inmates include Ponzi scheme mastermind Bernard Madoff, corporate looter John Rigas and terrorist leader Sheikh Omar Abdel Rahman.

U.S. District Judge Richard Holwell, who imposed the 11- year sentence Oct. 13 in Manhattan federal court, said he would recommend that the Galleon Group LLC co-founder be sent to the federal medical center in Butner, North Carolina, because of Rajaratnam’s health problems, which include diabetes.

The 5,045 inmates at the Butner prison complex also include Samuel Israel, the Bayou Group LLC hedge fund co-founder who directed a $400 million fraud, and Timothy Rigas, son of the Adelphia Communications Corp. founder John Rigas and a participant in the fraud that destroyed their company.

The choice of prison may be critical for Rajaratnam, 54, who, in addition to advanced diabetes, faces kidney failure and the necessity of transplant surgery, according to Holwell.

Holwell denied a request by Rajaratnam’s lawyers that the defendant remain free while appealing his conviction.

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London Court Clerk Pleads Guilty in First Bribery Act Case

A London court clerk accused of asking for a 500 pound ($789) bribe to help clear a suspect of a driving offense became the first person to plead guilty under the U.K.’s new bribery law.

Munir Patel, 22, who worked as an administrative clerk at Redbridge Magistrates’ Court in the Ilford neighborhood of London, pleaded guilty Oct. 14 to requesting and receiving a bribe under the law, which took effect in July. He also pleaded guilty to misconduct in public office.

The Bribery Act, considered by some lawyers to be the world’s strictest anti-corruption law, spurred companies doing business in the U.K. to hire lawyers and advisers to ensure they wouldn’t violate it.

Patel’s lawyer, Janice Johnson, told Judge John Price the clerk is “a man of good character.” He is scheduled to be sentenced in November.

Under the law, which is similar to the U.S. Foreign Corrupt Practices Act, companies must prove they have adequate controls to prevent corruption in order to defend themselves if a bribe is paid on their behalf anywhere in the world, even if company officials didn’t know.

Interviews/Speeches

NYSE’s Leibowitz Says Centralized Audit Trail Is ‘Critical’

Regulators should proceed with plans to collect and store data on all U.S. securities trading, an initiative that is “absolutely critical” to keeping markets fair, NYSE Euronext (NYX)’s chief operating officer said.

Larry Leibowitz, the chief operating officer of the New York Stock Exchange’s owner, made the remarks at a Society of American Business Editors and Writers conference in New York today.

After the May 2010 crash that erased $862 billion in 20 minutes, the Securities and Exchange Commission and stock markets implemented circuit breakers last year to prevent volatility in individual companies from spreading throughout the market. The SEC said this year that it might mandate a system that limits moves in securities prices.

“The SEC proposal to create centralized audit trail is absolutely critical so we can say someone is surveilling across all markets,” Leibowitz said. “It’s our job as an industry and the exchanges in particular to stand up for transparency and integrity.”

Regulators and exchanges are reviewing plans to improve surveillance of trading activity after the rout on May 6, 2010.

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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