After a four-month lobbying blitz led by firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM) and Credit Suisse Group AG (CS), there are signs that the fight over the Volcker rule may be shifting in Wall Street’s favor.
U.S. regulators and lawmakers are signaling they’re receptive to delaying and revising their plan, named for the former Federal Reserve Chairman Paul Volcker, to stop banks from making speculative trades on their own accounts. Representative Barney Frank, a Massachusetts Democrat and co-author of the 2010 law mandating the ban, urged regulators last week to simplify their first draft, while a bipartisan group of senators proposed pushing back its effective date.
Banking executives have long seen the Volcker rule as one of the most threatening parts of the Dodd-Frank regulatory overhaul, an assault on a lucrative line of business. To make their case in Washington, banks and trade associations have been pressing a coordinated campaign to get regulators from five federal agencies to scale back the draft of the proprietary- trading rule issued in October, according to public and internal documents and interviews. They recruited money managers, industrial companies, municipal officials and foreign governments to their side.
Some banks recommended consultants and law firms to help clients write letters arguing that the proposed language defines proprietary trading too broadly. Partnering with trade associations, the banks also commissioned studies, tested messages with focus groups, distributed talking points and set up a phone hotline for Capitol Hill staffers.
At a House Financial Services panel on Jan. 18, agency heads including Securities and Exchange Commission Chairman Mary Schapiro spoke of the challenge they faced writing a rule to end risky practices without crimping the flow of capital. Treasury Secretary Timothy F. Geithner said in a Dallas speech this month that there was “absolutely some work to do” on the provision.
JPMorgan spokesman Jennifer Zuccarelli, Credit Suisse spokesman Jack Grone and Goldman Sachs spokesman David Wells declined to comment.
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CFTC Will This Week on High Frequency Trading; INCTAD Study
The Commodity Futures Trading Commission will hold a meeting March 29 of the Technology Advisory Committee on automated, high frequency trading, the agency said in a statement.
The public meeting also will mark the first gathering of the new Automated and High Frequency Trading Subcommittee, which will focus on crafting suggestions on a definition of high frequency trading. The subcommittee, which will be headed by CFTC’s chief economist Andrei Kirilenko, will hold several meetings this year.
Separately, an increase in high-frequency trading in commodities is boosting the short-term correlation between prices for raw materials, including oil and food, with stocks and other assets, a study found.
Commodities have developed a correlation with U.S. stock markets at periods from one second to five minutes with the advance of high-frequency trading, which uses algorithms to analyze markets and execute orders, according to a study by Geneva-based economic affairs officers David Bicchetti and Nicolas Maystre at the United Nations Conference on Trade and Development.
High-frequency trading became more prevalent with technical innovation and introduction of full electronic trading, and also as investors opted for more active strategies, according to a copy of the forthcoming UNCTAD discussion paper posted on the Munich Personal RePEc Archive on March 20.
U.S. Regulators to Overhaul Supervision of Leveraged Loans
The three top U.S. banking regulators will issue tougher guidelines for high-risk, high-yield loans, and asked yesterday for public comment on the proposed rules.
“While there was a pull-back in leveraged lending during the crisis, volumes have since increased, while prudent underwriting practices have deteriorated,” the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a release in Washington.
Regulatory agencies have boosted their surveillance of financial-market and bank-lending trends to avert the emergence of asset bubbles that may lead to financial turmoil. While guidance isn’t enforceable, it details acceptable standards and provides examiners in routine bank exams with a rationale for targeting leveraged loans for tougher oversight.
Debt agreements “have frequently included features that provide relatively limited lender protection, including the absence of meaningful maintenance covenants,” the agencies said.
The regulators said the “vast majority” of community banks shouldn’t be affected because they have little exposure to leveraged loans. Comments on the proposal must be submitted by June 8.
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EU Said to Consider Compromise Proposals on Transaction Taxes
European Union officials are considering a financial- transaction tax deal that leaves out the most controversial elements of current proposals and offers more flexibility in applying the levy, an EU official said.
EU nations may consider approaches that apply to fewer products, such as excluding bonds and derivatives, and that operate within national borders, said the official, who declined to be identified because the information is confidential. That contrasts with a current plan, put forward by the EU’s regulatory arm, which would tax companies in their home country regardless of where trades took place.
Finance ministers may discuss the transaction tax at a meeting in Copenhagen this week, said Preben Aamann, a spokesman for Denmark, which holds the EU’s rotating six-month presidency. The commission’s initial proposal would use some of the tax’s revenue to support the EU budget. If all 27 EU nations agree on a narrower plan than the current proposal, it would keep alive the prospect of raising revenue for the broader economic union, the EU official said.
EU Ratings Rotation Plan Said to Face Possible Rejection
European Union finance ministers may scrap plans to force companies to rotate the credit-ratings companies they use on concerns that the measure may harm investor confidence and increase market volatility.
Denmark, which holds the rotating presidency of the EU, will seek an agreement by ministers this week on whether to delete the proposal, according to two people familiar with the matter who couldn’t be cited by name because the talks are private.
Michel Barnier, the region’s financial services chief, proposed the rotation rule last year as part of a draft law to toughen regulation of the industry amid concerns that some ratings decisions had exacerbated the region’s fiscal crisis. The U.K., Germany and Spain are among more than 10 EU nations in favor of removing the requirement from the law and possibly discussing it again when rivals to the so-called big three of Fitch Ratings Ltd., Moody’s Investors Service Inc. and Standard & Poor’s may have increased their market share and resources, according to one of the people.
Under Barnier’s plan, companies would be expected to change the company they pay to rate their credit every three years. The time limit could be extended if a business hires more than one ratings company.
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Bats Blaming Code in IPO Stirs Concern on Market Complexity
The software error that derailed the initial public offering of Bats Global Markets Inc. (BATS), where 11 percent of all U.S. stock trading occurs, rattled investors concerned about the growing complexity of financial markets.
Joe Ratterman, the chief executive officer, canceled the March 23 IPO after a computer malfunction kept Bats from trading on its own platform and forced a halt in Apple Inc. (AAPL), the world’s biggest company by market value. Transactions in Apple and trades for more than 1 million Bats shares were later canceled.
While engineers at the third-largest U.S. exchange owner reacted in seconds to restore order, the failed debut highlighted concerns about electronic exchanges at a time when regulation of financial markets is increasing after the worst crisis since the Great Depression. New venues have helped cut the proportion of shares changing hands on the New York Stock Exchange (NYX) and Nasdaq Stock Market in the corporations they list to less than 26 percent from at least 80 percent in 1997.
Daniel Hawke, an official with the SEC’s enforcement division, said last month that the agency is examining trading practices that gained dominance in the past decade amid the shift to automation. Regulators are weighing the benefits of electronic markets and exchange competition, which sped up executions and cut commissions for individuals, against technology concerns linked to faster trading and connections between venues.
Ratterman said scrapping the deal reflected its responsibility as a self-regulatory organization to maintain fair and orderly trading.
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RBS Rate Traders Sat With Libor Setter, Fired Employee Says
Royal Bank of Scotland Group Plc’s interest-rate traders were seated with one of the main rate setters in its London office to share information, and discussed rates on conference calls, a fired trader said.
Tan Chi Min, let go over accusations he manipulated the London interbank offered rate, made the claims in court papers filed with the Singapore High Court on March 23. Tan, who sued RBS for wrongful dismissal, has accused the bank of using an internal probe into Libor manipulation to find scapegoats after condoning such behavior.
Regulators worldwide are investigating whether banks attempted to manipulate rates including Libor, the basis for $360 trillion of securities around the globe. The probes have called into question whether the banks can be trusted to set the rates with minimal regulatory oversight. Investigators have sought information from lenders including RBS, Citigroup Inc. and Deutsche Bank AG. (DBK)
Paul White, RBS’s principal rate setter for yen Libor, and Tan’s team in London were “specifically seated together” in the London office to “facilitate the sharing of information and workload,” Tan, the bank’s former head of short-term interest- rate trading for the yen, said in court papers.
White, who was based in London, was also dismissed as part of the bank’s Libor probe, two people briefed on the matter said last month. He hasn’t been accused of wrongdoing by regulators. Contact numbers for White couldn’t be located through the Internet or directory assistance.
Tan’s lawyer Suresh Nair declined to comment.
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Investment Bank Dispute Ordered Reconsidered by High Court
The U.S. Supreme Court (1000L) told a lower court to reconsider deadlines for some securities lawsuits, in a dispute about whether investment banks must face accusations that they manipulated dozens of initial public offerings.
The ruling ordered lower courts to reconsider how long an investor can wait before filing lawsuits seeking to hold underwriters and corporate insiders accountable for “short swing” trades, those involving stock held for less than six months. Under federal securities law, insiders with large enough holdings must give back any profits from short-swing trades.
The high court overturned part of a decision by the 9th U.S. Circuit Court of Appeals, which said a two-year time limit for lawsuits over short-swing profits doesn’t begin until corporate insiders disclose the transactions in regulatory filings.
The justices split 4-4 on whether the law permits any extension of the deadline beyond two years after the stock-sale profits are realized. Chief Justice John Roberts, without giving a reason, didn’t participate in the case. The tie vote on that part of the case leaves intact the portion of the lower court decision that permits extensions of the deadline under some circumstances.
The justices sent the case back for further proceedings to determine what those circumstances may be, under rules that permit extensions of a statute of limitations in situations where a defendant has fraudulently concealed wrongdoing.
The justices told a federal appeals court to consider whether shareholder Vanessa Simmonds had enough information about the alleged wrongdoing that she should have filed suit sooner.
In addition to Simmonds, other defendants include units of Citigroup Inc., Credit Suisse Group AG (CSGN), Deutsche Bank AG (DB), JPMorgan Chase & Co. and Bank of America Corp., as well as Morgan Stanley and Goldman Sachs.
The case is Credit Suisse v. Simmonds, 10-1261.
Biomet to Pay $22.9 Million to Settle U.S. Bribery Claims
Biomet Inc., (BMET) a closely held maker of medical devices, agreed to pay $22.9 million to settle U.S. accusations that it bribed foreign doctors to win business, the government said.
Biomet, based in Warsaw, Indiana, will pay a $17.3 million criminal fine to the U.S. Justice Department and $5.6 million to the U.S. Securities and Exchange Commission, the SEC said yesterday in a statement.
The SEC sued Biomet under the Foreign Corrupt Practices Act yesterday in federal court in Washington. The regulator alleged the company and four of its subsidiaries from 2000 to 2008 paid bribes to doctors in Argentina, Brazil and China.
Bill Kolter, a spokesman for Biomet, declined to immediately comment on the settlement or bribery allegations.
The case is U.S. Securities and Exchange Commission v. Biomet Inc., 12-00454, U.S. District Court, District of Columbia (Washington).
EU Should Win Lagardere Stake Sale Challenge, Court Aide Says
European Union regulators should win an appeal against a court ruling that annulled Lagardere SCA (MMB)’s sale of a 60 percent stake in a French publisher to Wendel (MF), a court aide said in a non-binding opinion.
The EU’s Court of Justice, which gives nonbinding decisions, should overturn a 2010 judgment that said the European Commission didn’t properly review the sale of the Editis stake to Wendel, France’s largest publicly traded investment firm, said the court’s advocate general Jan Mazak in a legal opinion.
Shilling Says U.S. Banks Becoming ‘Financial Utilities’
Gary Shilling, president of A. Gary Shilling & Co., talked about the outlook for U.S. financial stocks.
Shilling spoke with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Shilling is a Bloomberg View columnist. The opinions expressed are his own.)
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Comings and Goings
Germany Will Work With Banks on BaFin Supervisor Nomination
Germany plans to work with the country’s banks on devising a process for nominating overseers for financial markets regulator BaFin, Finance Minister Wolfgang Schaeuble said yesterday at a conference in Berlin.
BaFin’s supervisory body never saw the need to interfere with regulation and banks don’t want to be BaFin’s “sole financiers” if they are removed from their position as overseers, Uwe Froehlich, president of the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken, said yesterday at the conference.
Citigroup Lines Up Managers for Japan Unit After Rule Breaches
Citigroup Inc. (C) lined up executives to lead Japanese operations as the third-biggest U.S. bank by assets seeks to restore its reputation in the country following regulatory breaches.
Peter Eliot will become chief executive officer of the Japan holding company in June, according to a person with knowledge of the appointment who declined to be identified because it hasn’t been announced publicly. Kazuya Jono will join the company from Sumitomo Mitsui Banking Corp. (8318) to become president of the banking unit in the same month, the person said.
Chief Executive Officer Vikram Pandit is trying to restore Citigroup’s standing in Japan, where regulators punished the New York-based lender for at least the third time in seven years in December. The selections of Eliot and Jono follow the resignation of Darren Buckley from both roles in January.
Mika Nemoto, a spokeswoman for Citigroup in Japan, declined to comment. The appointments were reported earlier today by the Nikkei newspaper.
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