CME Group Inc. (CME) plans to allow swaps traders to keep collateral with a third party, offering stronger protections than U.S. regulators required after MF Global Holdings Ltd. (MFGLQ) failed to safeguard $1.6 billion in customer cash.
CME Group, the futures exchange that’s expanding into clearing interest-rate and credit-default swaps, will give customers the option of holding their money at a neutral bank, said Kim Taylor, president of the Chicago-based company’s clearinghouse. The unaccounted-for customer funds at MF Global were within the brokerage’s control, not secured at either a clearinghouse or a third-party bank.
A Commodity Futures Trading Commission rule passed in January didn’t require collateral to be held by third parties and didn’t address misuse or loss of funds held by brokers. BlueMountain Capital Management LLC, Paulson & Co., Fidelity Investments and Och-Ziff Capital Management Group (OZM) have pushed for greater safeguards on the collateral they must provide to back positions, according to letters filed with the CFTC.
Banks, hedge funds and asset managers active in the $708 trillion over-the-counter derivatives market are adapting to changes mandated by the Dodd-Frank Act passed by Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. The demands for greater collateral protection were underscored by the $1.6 billion of customer cash that went missing after MF Global filed the eighth-biggest bankruptcy in U.S. history on Oct. 31.
A group of more than 100 swaps users and service providers has been meeting to understand the collateral rules passed by the CFTC and to determine if a better system should be available, according to three members of the group who asked not to be named because the discussions are private.
The so-called “segregation working group,” which began meeting in January, includes representatives from Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co., (JPM) BlackRock Inc., (BLK) Newedge Group SA, Moore Capital Management LP, Fidelity Investments, Vanguard Group Inc., and CME Group, among others, according to six people familiar with the firms’ involvement.
Representatives of the companies declined to comment.
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Dutch Finance Minister Plans to Study Adopting Volcker Rule
Dutch Finance Minister Jan Kees de Jager will study adopting a Volcker rule on banning proprietary trading at the country’s banks to bolster financial stability.
The rule is named after former Federal Reserve Chairman Paul Volcker, who championed the ban as an adviser to President Barack Obama. While proprietary trading remains small in the Netherlands, the rule would curb any potential expansion, De Jager said.
The government is shoring up the stability of lenders, including ING Groep NV (INGA), ABN Amro Group NV and Rabobank Groep, which have a combined balance sheet almost five times the size of the Dutch economy. De Jager said he would prefer the Europe- wide ban on risky trading, which is being investigated by a European Commission committee.
Hungary Sends Central Bank Law Changes to ECB, Ministry Says
Hungary has sent draft changes to a central bank law to the European Central Bank for an opinion in a bid to start talks on international aid, according to an e-mailed copy of a letter sent by Economy Minister Gyorgy Matolcsy to ECB President Mario Draghi yesterday.
Hungary is offering to end the practice of a government representative attending Monetary Council meetings and would not require the rate-setting body to send its agenda to the Cabinet, according to the amendments. The government would also scrap an option to combine the central bank with the financial regulator which could lead to demotion of the Magyar Nemzeti Bank president.
The amendments don’t address the reduction of the central bank president’s salary or the expansion of the Monetary Council or possible addition of a vice president, steps previously criticized by the ECB because they could undermine the independence of the Magyar Nemzeti Bank.
Danish Banks Attack Impairment Rules They Say Choke Lending
Danish banks are lashing out at the country’s financial regulator for imposing stricter impairment requirements that the industry warns will choke lending and hamper an economic recovery.
The rules will inflate the financial industry’s loan losses and prompt banks to retrench to protect capital buffers, said Poul Kjaer, head of regulation at the Danish Bankers Association in Copenhagen. The Financial Supervisory Authority argues tighter rules are needed to restore confidence in the industry and prevent a repeat of accounting abuses that led to Denmark’s banking crisis.
Denmark last week presented its fifth bank rescue bill since 2008 as lawmakers struggle to end a crisis that claimed three lenders last year and forced losses on senior creditors. The bank regulator has tightened standards in an effort to restore credibility to an industry burnt by a property bubble that burst in 2007. Banks and business groups say regulatory measures now risk exacerbating the crisis rather than ending it.
The Danish Bankers Association has taken its case to Business Minister Ole Sohn in an effort to prevent the FSA from implementing its proposal.
The proposal requires lenders to write down the value of their property portfolios to match market declines, the FSA said Feb. 6.
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Cordray Says Consumer Bureau ‘Zoning In’ on Tribal Payday Firms
U.S. Consumer Financial Protection Bureau Director Richard Cordray said his agency is prepared to use federal authority to crack down on payday lenders who dodge state laws by affiliating with Native American tribes.
Responding to a question from Colorado Attorney General John Suthers in Washington yesterday, Cordray said his agency and the Federal Trade Commission are looking into what they can do about tribe-based lenders who claim immunity from state laws.
Cordray, who made comments after a speech at a National Association of State Attorneys General conference, said that the bureau is “zoning in” on this issue, as will as the FTC, noting that tribal entities cannot oust the federal government on jurisdictional grounds.
Sovereign immunity allows Native American tribes to run businesses such as casinos even in states or localities where gambling is illegal. Some tribes have claimed immunity for payday lending firms, which consumer groups have accused of charging usurious interest rates to mainly low-income borrowers.
Covering Stanford Losses Would Drain Fund, SIPC’s Harbeck Says
The fund set aside to aid customers of failed brokerage firms would be drained if it’s forced to cover investors’ losses in the fraud of R. Allen Stanford and similar cases, said Stephen Harbeck, president of the Securities Investor Protection Corp.
The U.S. Securities and Exchange Commission has taken SIPC, a nonprofit corporation funded by the brokerage industry, to court demanding that it help Stanford customers. SIPC argued in U.S. District Court in Washington last month that there is no basis to require it to guarantee investments with an entity that isn’t a member, in this case Antigua-based Stanford International Bank Ltd.
SIPC, funded by assessments from member firms, hasn’t previously drawn from its $2.5 billion Treasury line of credit, Sharon Y. Bowen, SIPC’s acting chairman, told lawmakers.
In June, the SEC ordered SIPC to start a process that could grant as much as $500,000 for each of the more than 7,000 Stanford clients -- the same maximum it offers in any case.
Stanford was convicted of fraud yesterday in what prosecutors said was a $7 billion scheme involving bogus certificates of deposit at his Antigua-based bank.
AIJ President Asakawa May Be Questioned by Japan Lawmakers
Japanese lawmakers plan to question AIJ Investment Advisors Co. President Kazuhiko Asakawa, whose whereabouts are unknown following the asset management firm’s suspension for possible losses.
The lower house of parliament will ask Asakawa to appear before its financial committee on March 14, Shunichi Yamaguchi, an opposition Liberal Democratic Party lawmaker, told Bloomberg News in Tokyo today.
The Diet will send the request in writing and ask that Asakawa give reasons should he decline, said Yamaguchi, a member of the committee. “It’s unclear where he is,” he said.
The committee will also ask to speak with executives from the pension fund industry, Yamaguchi said.
Separately, Human Holdings Co. (2415), the school and health-care company that’s plunged 9 percent since disclosing it was a client of suspended AIJ Investment Advisors Co. (0202964D), pledged to seek compensation for losses from the Japanese asset manager.
Human Holdings is speaking with its lawyers to see if it can claim damages for possible losses on the 330 million yen ($4.1 million) that AIJ managed for the company as of Dec. 31, Yusuke Kawashita, an executive officer, said in an interview.
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The nation’s securities watchdog may extend a one-month suspension of AIJ Investment Advisors Co. (0202964D) as investigations into the asset manager expand to Hong Kong, two government officials with knowledge of the matter said.
The Financial Services Agency is considering prolonging the business stoppage by at least 30 days as the March 23 deadline approaches, the officials said on condition of anonymity because the discussions are private. Japanese authorities called on their Hong Kong counterparts to help find out what happened to the 185.3 billion yen ($2.3 billion) of pension assets managed by AIJ and determine any wrongdoing, one of the officials said.
AIJ, led by former Nomura Holdings Inc. (8604) branch manager Kazuhiko Asakawa, has failed to account for most of the money, prompting the regulator to embark on its biggest investigation of the nation’s fund managers. Prime Minister Yoshihiko Noda’s party has set up a panel to study stricter oversight as the case calls into question the safety of pensions in a country where more than a fifth of the population is over 65.
Phone calls to AIJ yesterday reached an automated recording that didn’t take messages.
Employees of AIJ have been cooperating with the inspection performed by the Securities and Exchange Surveillance Commission, the official said, while they have failed to fully explain issues such as the whereabouts of the investments under management. The person didn’t name the AIJ staff it spoke with.
Jonathan Li, a spokesman for Hong Kong’s Securities and Futures Commission, declined to comment on whether the regulator is assisting with the investigation.
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Renault Luxembourg Departures Reviewed in False-Spying Inquiry
An investigation into false spying claims against three Renault SA (RNO) executives fired last year was expanded to include three more departures from the French automaker’s Luxembourg retail group in 2009, the company said.
“The judge is investigating the circumstances of the departures, in 2009, of three employees of RRG Luxembourg,” as part of a probe opened in March 2011, the company said in an e- mailed statement March 6. Renault, which said it was a victim of the fraud, said it is continuing to cooperate.
Renault fired the French workers after receiving an anonymous tip that they hid money paid to them for spying on the automaker’s electric-car program in bank accounts in Switzerland and Liechtenstein. Investigators found the accounts didn’t exist and the men hadn’t spied on the company, and Renault apologized, saying it was a victim of manipulation.
Renault’s Luxembourg unit fired two employees, including its then-chief financial officer, and forced its head of technical services to resign in 2009 after receiving information they also hid money in bank accounts in Switzerland and Liechtenstein, L’Essentiel, a Luxembourg publication, said yesterday citing Antonio Dorego, the man forced to resign.
Dorego won a wrongful-termination suit against Renault in Luxembourg and he and the two others have joined the French investigation, L’Essentiel said. Calls to the lawyer representing the three former Luxembourg employees and to Renault’s lawyer for comment on the reports weren’t immediately returned.
Ex-Citigroup Indonesia Banker Convicted of Stealing From Clients
Inong Malinda Dee, a former relationship manager at Citigroup Inc. (C)’s Indonesia unit, was convicted of stealing from clients by a three-judge panel and sentenced to eight years in jail.
Dee, who denied the charges, was also fined 10 billion rupiah ($1.1 million), according to a ruling delivered by Judge Gusrizal at the South Jakarta district court yesterday.
Prosecutors had accused Dee, 49, of wrongfully transferring more than $5 million from her clients’ accounts from 2007 to February 2011. Dee made the clients sign blank transfer forms or forged their signatures, according to prosecutors, who sought a 13-year jail term and a 10 billion rupiah fine.
“From the time we first identified the suspicious transactions in our customers’ accounts, we have worked closely with our regulators and the police to ensure the responsible persons were held accountable,” Citigroup spokesman Richard Tesvich said. The lender has compensated clients for the related losses, he said.
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El Paso’s Lawyers at Wachtell Opposed Using Goldman, Lawyers Say
El Paso Corp. executives ignored advice from their lawyers at Wachtell, Lipton, Rosen & Katz that the pipeline operator shouldn’t use Goldman Sachs Group Inc. as an adviser on Kinder Morgan Inc. (KMI)’s $21.1 billion bid for the company, lawyers for El Paso investors said.
Attorneys from New York-based Wachtell urged El Paso not to hire Goldman Sachs as a financial adviser on the $25.91-a-share offer because of its conflicting interests in the deal, Stuart Grant, a lawyer for El Paso investors who lost a bid last week to stop a shareholder vote on the acquisition, said in a telephone interview yesterday.
Delaware Chancery Court Judge Leo Strine also rebuked Goldman on Feb. 29 for its handling of its conflicts in the El Paso case in a 33-page ruling rejecting disgruntled investors’ calls to block a shareholder vote on the deal.
Arie Finkel, a spokeswoman for New York-based Wachtell, didn’t immediately return calls for comment yesterday on El Paso officials’ decision not to accept the law firm’s advice on Goldman Sachs’ role in the Kinder buyout offer.
David Wells, a spokesman for Goldman Sachs, said in a telephone interview that he couldn’t comment on Wachtell’s advice to El Paso in connection with the Kinder buyout offer.
The case is In re El Paso Corp. Shareholder Litigation, Consolidated 6949-CS, Delaware Chancery Court (Wilmington).
U.K. Urges Tougher EU Capital Proposals for Bank Insurance Arms
U.K. Treasury Minister Mark Hoban said that draft European Union capital rules for banks needed to be made stricter to prevent lenders with insurance arms from avoiding the full impact.
European Commission proposals aren’t sufficient because they would allow so-called companies to count their insurance arms’ reserves toward meeting their banking arm’s capital requirements, Hoban said.
The rule if left unchanged would “render the capital surcharge irrelevant for some of Europe’s largest banks,” Hoban said, according to a copy of his remarks in Brussels yesterday.
Comings and Goings
Obama Aides Said to Have Looked at Gates, Nooyi for World Bank
President Barack Obama and his advisers, casting a wide net for potential candidates to lead the World Bank, considered in initial discussions Microsoft Corp. (MSFT) Chairman Bill Gates, PepsiCo Inc. (PEP) Chairman and Chief Executive Officer Indra Nooyi, and former Brown University President Ruth Simmons, according to a person familiar with the White House search.
Obama sought to look beyond the ranks of banking and government in seeking a replacement for Robert Zoellick, who plans to step down at the end of his term in June, said the person, who asked not to be named because the search process is confidential.
The White House now is narrowing its consideration to a smaller group that includes former Treasury Secretary Lawrence Summers, who was Obama’s first director of the National Economic Council, Massachusetts Democratic Senator John Kerry and United Nations Ambassador Susan Rice, the person said.
John Pinette, a spokesman for Gates, and Peter Land, a spokesman for PepsiCo, both declined to comment. A White House official said that Obama has begun to consider the issue.
Last month, concerned that the U.S. might lose its prerogative to select the World Bank president if challenged by the developing world, Obama asked his aides to expand the list of potential candidates.
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