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Real-Time Swap Rule, Sunstein Memo, Brazil Banks: Compliance

The U.S. Commodity Futures Trading Commission has completed Dodd-Frank Act rules requiring swaps brokers to decide within minutes whether to clear a trade in an effort to reduce risk in the $708 trillion global swaps market.

The CFTC voted 4-1 yesterday to adopt the regulation, which requires Wall Street banks or clearinghouses operating on their behalf to accept or reject trades for clearing as soon as technologically possible -- in “milliseconds or seconds, or at most, a few minutes,” according to a CFTC summary of the rule.

Vanguard Group Inc., based in Valley Forge, Pennsylvania; Citadel LLC, the Chicago hedge fund founded by Ken Griffin; and DRW Holdings LLC, a Chicago-based proprietary trading firm, have urged the CFTC to require real-time decisions on clearing to prevent the risks of disruption and uncertainty in the swaps market.

The CFTC and Securities and Exchange Commission are leading U.S. efforts to write new regulations for the swaps market after largely unregulated trades helped fuel the 2008 credit crisis. Dodd-Frank, the 2010 financial-regulation overhaul, is intended to reduce risk by having most swaps guaranteed by clearinghouses that stand between buyers and sellers.

The CFTC may require Wall Street banks and large funds to clear certain types of swaps as early as October, CFTC Chairman Gary Gensler said at the meeting in Washington.

The agency may publish recommendations in April for which types of swaps will face the mandatory clearing requirement, which would then be open to a 90-day review process.

Once the CFTC determines that a particular type of swap must be cleared, the largest swap-dealers have 90 days before they must comply with the mandate, Gensler said. The first determinations could come as early as July, he said.

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Compliance Policy

Tokyo Grain Exchange to Transfer Farm Futures Trading

The Tokyo Grain Exchange will transfer trading of farm futures to either the Tokyo Commodity Exchange or the Kansai Commodities exchange, said Yoshiaki Watanabe, president of the grain bourse.

The transfer was made to maintain agricultural futures markets in Japan, Watanabe told reporters in Tokyo today, without elaborating. The bourse trades corn, soybeans, coffee, raw sugar, rice and azuki beans.

The exchange has been under pressure from shareholders to halt operations and transfer trading of farm futures to rivals because of declining volumes. The bourse is losing about 40 million yen ($477,398) a month as retail investor participation shrank after the government tightened regulations covering sales of riskier financial assets to individuals, according to Jitsuo Tatara, chairman of broker and shareholder Yutaka Shoji Co. (8747)

Tokyo Grain Exchange had an operating loss of 773.7 million yen in the year ended March 31, 2011.

Japan’s cabinet approved a plan earlier this month that would allow the formation of a one-stop platform where investors can buy equities, futures and commodities from a single venue.

If the legislation is passed by parliament, the Financial Services Agency would become responsible for oversight of stock, commodity and grain exchanges. Oversight is currently divided between the FSA and the trade and agriculture ministries.

Agencies Must Weigh Effects of Business Rules, Sunstein Says

U.S. agencies should weigh the cumulative regulatory burden on small businesses and startups when crafting new rules, said President Barack Obama’s top regulator.

“The President’s Council on Jobs and Competitiveness has emphasized the need for a smart and efficient regulatory system and has drawn particular attention to the cumulative effects of regulation,” Cass Sunstein, administrator of the White House Office of Information and Regulatory Affairs, said in a memo yesterday. “Cumulative burdens can create special challenges for small businesses and startups.”

Obama issued an executive order in January 2011 directing U.S. agencies to promote “coordination, simplification and harmonization” and calling for the issuing of rules only when benefits justify costs.

Sunstein emphasized the need for early consultation “with advance notice to, and close engagement with, affected stakeholders” and said that “consideration of cumulative effects and of opportunities to reduce burdens and to increase net benefits should be part of the assessment of costs and benefits.”

Rules approved in the first 32 months of Obama’s presidency cost $19.9 billion, with net benefits of more than $91 billion, according to the White House Office of Management and Budget.

William Kovacs, senior vice president of regulatory affairs for the Washington-based U.S. Chamber of Commerce, the nation’s largest business-lobbying group, said Sunstein’s office hasn’t listened to the group’s complaints about redundant rules.

Republicans have criticized Obama for issuing rules they said are too costly and have made his approach to regulation a campaign issue.

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Brazil Antitrust Agency Plans to Rule on Banks, Chinaglia Says

Brazil’s antitrust regulator plans to continue ruling on bank mergers and practices, defying previous government attempts to limit its authority, said Olavo Chinaglia, acting head of the agency.

In 2001, then-President Fernando Henrique Cardoso signed a binding interpretation of the national laws granting the central bank final word on antitrust issues involving financial institutions. The goal was to ensure that the antitrust agency, known as CADE, wouldn’t block acquisitions that were approved to rescue troubled banks that posed a risk to the stability of the financial system.

The central bank said yesterday in an e-mailed message that it has sole authority over such mergers and it does take questions of competition into account. CADE, despite the controversy over its jurisdiction, gave final approval in 2010 to the creation of Itau Unibanco Holding SA (ITUB4), Latin America’s biggest bank, and to the purchase of Nossa Caixa by Banco do Brasil SA. The agency last August demanded that Banco do Brasil change contracts on lines of credit under which payments are deducted from payrolls.

Officials from CADE and the central bank are holding talks to evaluate changes in the law, said Isaac Ferreira, general counsel at the bank, in the e-mailed statement. Ferreira added that the rule is clear regarding the bank’s exclusive power to rule on mergers of financial institutions.

SEC Urges U.S. Congress to Amend Dodd-Frank’s Swap-Data Rules

Congress should amend the Dodd-Frank Act to remove barriers to global regulators sharing data about the $708 trillion swaps market, the U.S. Securities and Exchange Commission’s head of international affairs said.

The 2010 law requires regulators from other nations to indemnify so-called swap-data repositories and U.S. regulators for litigation costs before accessing the data. The requirement may undermine regulators’ access to data kept in repositories such as the Depository Trust and Clearing Corp. as they seek to enforce new rules designed to reduce risk and increase transparency.

Ethiopis Tafara, the SEC’s head of international affairs, said in testimony prepared for a House Financial Services subcommittee hearing yesterday that the requirement interferes with access to information because most foreign governments lack authority to provide indemnification.

The House subcommittee, controlled by Republicans, is considering legislation that would repeal the indemnification requirement. Dodd-Frank, enacted after largely unregulated swaps helped fuel the 2008 credit crisis, is intended to increase transparency of the derivatives market by requiring price and trade information to be reported to data repositories.

Compliance Action

OSC Outlines Concerns for Emerging Market Issuers

The Ontario Securities Commission published a report summarizing its review of emerging market issuers and outlining principal sources of concern relating to issuer disclosure, underwriter conduct, the role of auditors and the exchange listing process.

The review uncovered areas where issuers and gatekeepers need to improve in order to meet their obligations, Howard Wetston, chief executive officer of the commission, said yesterday in a statement. The commission “will be monitoring their progress to ensure the interests of investors are placed first,” Weston said in the statement.

China CIRC Issues Insurer Rules; Company Rules Eased in Taiwan

The China Insurance Regulatory Commission issued rules to improve insurers’ management of reserve requirements for non- life businesses, according to a statement posted on its website. It didn’t elaborate.

Separately, Taiwan eased rules to allow Chinese investments in that nation in 161 more industries, including LED and solar- battery businesses, Taiwan’s economic ministry said in a statement.

FSA Secures 32 Million-Pound Judgment Against Three Land Banks

Three land banks were ordered to pay 32 million pounds ($50.7 million) to the U.K.’s financial watchdog for selling land unlawfully and operating an investment scheme without authorization, the Financial Services Authority said in an e- mailed statement.

Victims of the scam are unlikely to compensated as they aren’t covered by the Financial Services Compensation Scheme, the FSA said today in the statement. The FSA said it hasn’t identified any assets that will enable more than a small proportion of payments to be made.

Japan to Raid AIJ Investment, ITM Securities, Nikkei Says

Japan’s Securities and Exchange Surveillance Commission will soon raid the offices of AIJ Investment Advisors (0202964D) and affiliate ITM Securities (ITMSCZ), the Nikkei newspaper reported, without attribution.

AIJ President Kazuhiko Asakawa may be summoned to parliament to testify about company losses, Nikkei said.

Japan’s Financial Services Agency will revoke the company’s registration March 23, the newspaper reported.

AIJ was suspended by the Japan Financial Services Agency on Feb. 24 over possible losses on assets it managed for pension funds.

Senate Fails to Advance Amendment Reauthorizing U.S. Ex-Im Bank

Senate Republicans defeated a motion to set a vote on a measure reauthorizing the U.S. Export-Import Bank as part of a bill rolling back U.S. Securities and Exchange Commission rules for newly public companies.

The Senate voted 55-44 yesterday, with 60 needed, to end debate on the amendment sponsored by Democrats Tim Johnson of South Dakota and Maria Cantwell of Washington and Republicans Lindsey Graham of South Carolina and Richard Shelby of Alabama.

J&J Sold Vaginal Mesh Implant Without U.S. Regulatory Approval

Johnson & Johnson (JNJ) sold a vaginal mesh implant for three years before U.S. regulators approved the device, now the subject of more than 550 lawsuits by women who claim it injured them.

J&J introduced the Gynecare Prolift device in March 2005, touting it in an annual report as an “innovative and effective surgical option” for weakened pelvic muscles. The U.S. Food and Drug Administration said it learned of the Prolift in 2007, when J&J sought approval for a related product. The FDA cleared both devices in May 2008.

The company, the world’s second-biggest health-care products maker, said it could market the Prolift without approval because it was so similar to an approved device, the Gynecare Gynemesh, said Morgan Liscinsky, an FDA spokeswoman, in a March 16 e-mail. “FDA disagreed with this assertion,” concluding distribution began “without appropriate” clearance, she said.

An FDA report in July found a fivefold jump in deaths, injuries or malfunctions tied to vaginal mesh for prolapsed organs.

J&J’s unauthorized sales might cost it more to resolve lawsuits over the product. J&J already has endured recalls of artificial hip implants and over-the-counter drugs. The conduct by J&J’s Ethicon unit also raises anew questions about the FDA’s fast-track approval process.

J&J introduced the original Prolift in March 2005 after “applying the relevant FDA guidance and based on the safety and effectiveness” of Gynemesh, Matthew Johnson, a spokesman for the New Brunswick, New Jersey-based company, said in an e-mail.

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Courts/Tribunals

Ex-Morgan Stanley (MS) Broker Faces Testimony Loss in Ruling’s Appeal

Former Morgan Stanley broker Mark Mensack, ordered by industry arbitrators to repay $1.2 million in bonus and lawyer’s fees, may struggle to overturn the ruling after eight hours of testimony went unrecorded.

Mensack, now a managing director at Piedmont Investment Advisors, said he is seeking to appeal a decision after it led to his bankruptcy. The Financial Industry Regulatory Authority, which organizes arbitration proceedings for brokerages, their employees and customers, told him that eight of the 18 hours of testimony from the hearing weren’t recorded because of mechanical or human error, he said.

The missing testimony may make it more challenging for Mensack to have the arbitration panel’s decision overturned, a procedure that is almost always daunting, said Howard Meyers, a professor at New York Law School.

In April 2010, Morgan Stanley filed an arbitration claim alleging breach of promissory note and demanding Mensack return funds he got under a signing-bonus loan, according to the arbitrators’ July ruling. Mensack filed a counterclaim, alleging the firm violated New Jersey’s whistle-blower protections and interfered with his business relationships, the order shows. He demanded more than $5 million in damages and fees.

Mensack said in an e-mail that he initially sought to have a claim heard in court, before Morgan Stanley filed its arbitration case.

Michelle Ong, a spokeswoman for Finra, declined to comment.

Ex-Taylor Bean Finance Chief Admits Role in $3 Billion Fraud

Taylor, Bean & Whitaker Mortgage Corp.’s former finance chief admitted to helping his boss, Lee Farkas, commit what prosecutors say was one of the largest bank frauds in U.S. history.

Delton de Armas, 41, pleaded guilty yesterday in federal court in Alexandria, Virginia, to one count of conspiracy to commit bank and wire fraud and one count of false statements in a scheme that contributed to the failures of Montgomery, Alabama-based Colonial Bank and its parent, Colonial BancGroup, once among the nation’s 25 biggest depository banks.

He is scheduled to be sentenced June 15.

Taylor Bean, based in Ocala, Florida, was servicing more than 500,000 mortgages, including $51 billion of Freddie Mac loans, when it collapsed in August 2009, according to court records. The case is U.S. v. Armas, 12-00096, U.S. District Court, Eastern District of Virginia (Alexandria).

Interviews/Speeches

SEC’s Schapiro Says Agency Making Leaps to Close Technology Gap

The U.S. Securities and Exchange Commission is updating the technology it uses to understand operations at the financial firms it regulates and to catch wrongdoing, said SEC Chairman Mary Schapiro.

Schapiro discussed the technology upgrade in remarks prepared for a Securities Industry and Financial Markets Association event yesterday in Miami Beach, Florida. The SEC, she said, has been behind other regulators in use of technology that may help the agency analyze and search the information it gathers so that “malefactors will find themselves trapped by more comprehensive investigations.”

The SEC has also been working on a wide range of technology upgrades to core areas, Schapiro said, such as the EDGAR financial filing system used by all U.S.-listed companies, the agency’s website and the way it takes in and evaluates enforcement tips.

Geithner Says No Meaningful Liquidity Risk in Volcker Rule

Treasury Secretary Timothy F. Geithner said he doesn’t think the Volcker rule ban on proprietary trading will present a “meaningful risk” to liquidity or credit availability in European countries.

“I don’t believe, that despite the concerns expressed by governments and central banks, the rule as drafted presents a meaningful risk to liquidity or credit in those countries,” Geithner told the House Financial Services Committee yesterday. He said he’s confident U.S. regulators will find the “right balance” in implementing the rule.

The Volcker rule is intended to reduce the chance that banks will make risky investments with their own capital that put depositors’ money at risk.

Officials from Canada, Japan, the U.K. and the European Banking Federation have said in letters to U.S. regulators that the measure would harm global liquidity and international cooperation.

The restrictions on banks’ trading activities are scheduled to take effect July 21.

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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