ECB-Loan Profits, Carry Trades, Basel Boundaries: Compliance

Banks may have to disclose profits from carry trades derived from 1 trillion euros ($1.3 trillion) in European Central Bank loans and exclude the money from bonus pools, under draft proposals from European Union lawmakers.

Profit from carry trades, where investors borrow money at a low interest rate to buy higher yielding securities, “should not count toward computation of remuneration and bonus pools” at banks, under plans being weighed by European Union lawmakers, according to a document obtained by Bloomberg News. The measure is one of dozens of proposed amendments to legislation to implement global capital and liquidity rules for EU lenders.

The ECB began two rounds of extraordinary three-year loans at an interest rate of 1 percent in December in its longer-term refinancing operations to ease funding conditions for European banks. ECB President Mario Draghi yesterday left open the option of further stimulus if the region’s economy continues to deteriorate.

Banks should disclose “profit made from the ECB LTRO through carry trades” according to proposed amendments from members of the EU parliament contained in the document.

Sharon Bowles, an EU lawmaker identified as the author of the LTRO proposal in the document, didn’t immediately respond to an e-mail seeking comment. Chantal Hughes, spokeswoman for EU Financial Services Commissioner Michel Barnier, declined to comment on the proposals.

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Compliance Policy

Basel Seeks Tougher Boundary Between Banking, Trading Books

Banks face tougher rules on how they differentiate between assets they keep in their banking and trading books, making it harder to dodge capital rules, under proposals published by the Basel Committee on Banking Supervision yesterday.

Lenders would have to give regulators evidence of buying and selling of securities in their trading books and face limits on their ability to shift assets between books under the plan. The risk of credit crunches would also need to be taken into account in calculations of how much cash they should keep in reserve against trading losses.

The proposals are “a vital element of the objective to achieve comparability of capital outcomes across banks, particularly those which are most systemically important,” the Basel group said in the report published on its website.

The Basel group, which brings together banking regulators from 27 nations including the U.K., U.S. and China, agreed in 2010 to more than triple the core capital that financial firms must hold. Last year, it also targeted 29 lenders including Deutsche Bank AG, BNP Paribas SA (BNP) and Goldman Sachs Group Inc. (GS) for capital surcharges of as high as 2.5 percent of their assets in a bid to rein in lenders deemed too big to fail.

Trading books represent portfolios of securities that banks want to actively trade while banking books contain products that lenders intend to hold to maturity. Banks and other interested parties have until Sept. 7 to respond with their comments to the proposals, the committee said.

CFTC Said to Delay Derivatives Exchange Rule Opposed by CME

The U.S. Commodity Futures Trading Commission may delay a final vote on regulations governing derivatives exchanges amid internal dissent on a rule that may restrict CME Group Inc. (CME), owner of the world’s largest futures exchange, according to four people briefed on the matter.

The rule, proposed in 2010, sought to require at least 85 percent of a contract’s trading to occur on a central market. The agency is preparing to approve a series of other requirements while delaying the provision that sets percentage levels, said the people, who spoke on condition of anonymity because the rulemaking process is private. Under the proposal, an exchange would be forced to de-list a contract if it didn’t meet the 85 percent level.

The 85 percent level is arbitrary, CME said.

The commission proposed the threshold to ensure that there would be adequate trading in a central market to allow for price discovery in a contract. De-listed contracts could be traded on other types of trading platforms known as swap-execution facilities. The CFTC has yet to finalize rules governing those trading systems.

Steve Adamske, a CFTC spokesman, declined to comment.

SEC Reopens Comment Period for Proposed Broker-Dealer Rules

The U.S. Securities and Exchange Commission said it is re- opening the public-comment period for proposed changes to its net capital, customer protection, books and records, and notification rules for broker-dealers.

The SEC hasn’t acted on the proposals initially released in 2007, and “given economic events, regulatory developments and passage of time since then” is re-opening them to comment for 30 days, the agency said in a statement yesterday.

Compliance Action

HSBC’s Swiss Wealth Unit Says U.S. Fine May Be ‘Significant’

HSBC Holdings Plc (HSBA)’s Swiss private bank said fines and penalties relating to a tax-evasion probe by the U.S. “could be significant” as it published figures showing clients outflows in the second half of last year.

The terms or timing of a resolution to the U.S. Justice Department and Internal Revenue Service investigations can’t currently be determined, Geneva-based HSBC Private Bank (Suisse) SA said in its annual report published on the firm’s website. The bank said it’s cooperating with the U.S. probe.

Switzerland and the U.S. are holding talks to resolve an investigation involving 11 Swiss financial firms after the Justice Department indicted Wegelin & Co. on Feb. 2 for allegedly helping customers hide money from the IRS. HSBC’s Swiss private bank reported a drop in 2011 profit as assets under management fell by 12 billion Swiss francs ($13 billion) to 166 billion francs.

“We also incurred significant expenses for conducting investigations into our past U.S. client-related activities, which were carried out in response to requests from various U.S. government agencies,” HSBC said in the annual report.

Credit Suisse Group AG (CSGN), Switzerland’s second-biggest bank, set aside 295 million francs for U.S. tax matters in the third quarter of last year. Julius Baer Group Ltd. (BAER), the wealth manager established in 1890, said the cost of the investigation isn’t “reliably assessable” after the Justice Department indicted two employees of the Zurich-based firm.

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Banks to Suggest BaFin Overseers, Frankfurter Allgemeine Reports

German Economy Minister Philipp Roesler gave the country’s financial industry the right to suggest three of six independent experts on regulator BaFin’s administrative board, Frankfurter Allgemeine Zeitung reported, without saying where it got the information.

That represents a partial success for Germany’s banking, insurance and investment associations, which will lose their 10 of the 21 seats on BaFin’s board as part of an overhaul of the country’s regulators approved by the Cabinet May 2, the Frankfurt-based newspaper said.

CME Delays Expansion of Trading Hours for Grain by One Week

CME Group Inc., owner of the world’s largest futures exchange, delayed the start of expanded trading hours for its grain markets by a week, allowing time for regulators to review the proposal.

Electronic trading will expand to 22 hours a day for agricultural commodities including corn, soybeans and wheat starting with the trade date on May 21, up from 17 hours now, Chicago-based CME said yesterday in a statement. On May 1, CME said it planned to begin the new hours on May 14, the same day that the rival IntercontinentalExchange Inc. (ICE) was set to begin offering grain and oilseed contracts for the first time.

The Commodity Futures Exchange Commission requires at least 10 business days to review any changes, R. David Gary, a commission spokesman, said yesterday by telephone from Washington.

U.K. Serious Organised Crime Agency Website Disrupted by Hackers

U.K. The Serious Organised Crime Agency’s website was disrupted May 2 after it was targeted by computer hackers.

The crime agency temporarily took the website out of service after it was hit by a so-called distributed denial of service attack, said Stuart Hadley, a SOCA spokesman. The agency’s website was also attacked last year by hackers linked to the groups LulzSec and Anonymous.

A so-called DDOS attack occurs when a website is visited by a large number of visits, causing the web address to go off line. SOCA’s website remained out of service yesterday.

The agency said in an e-mailed statement yesterday the website contains only “publicly available information and does not provide access to operational material.”

A British man was arrested in June for attacking websites including SOCA’s and charged with committing unauthorized acts with a computer.

CME Raises Margins for Non-Hedged Accounts to Meet CFTC Rule

CME Group Inc., the world’s largest futures exchange, is raising futures margins for non-hedged accounts from May 7 to comply with new regulations.

Members will be treated as speculators for outright positions, paying a higher margin, said the exchange, which trades everything from energy, agriculture and metals to interest rates and equity indexes. Members are currently treated as hedgers rather than speculators even if they are entering into a speculative position.

President Barack Obama last month urged Congress to bolster federal supervision of oil markets, including bigger penalties for market manipulation and greater power for regulators to increase the amount of money traders must put up to back their bets. Regulators are seeking to limit speculation in commodities and ban so-called proprietary trading at banks.

The change in so-called performance-bond requirements was in response to a rule adopted last year by the Commodity Futures Trading Commission targeting all speculative trading accounts that are regulated as futures or swaps, the Chicago-based exchange said in a statement May 2.

Commodity regulators are seeking to provide clearinghouses with a cushion of available customer collateral to reduce risks in derivatives trades. Exchanges traditionally have drawn a distinction between hedging and non-hedging positions when they have set margin requirements for customers, the CFTC said in its final rule, scheduled to take effect May 7.

Complying with the CFTC rule will affect exchange members that have speculative positions, including traders who lease trading privileges, said Laurie Bischel, a CME spokeswoman.

‘Too High’ Card Fees Under Antitrust Scrutiny, EU’s Almunia Says

Bank card fees paid by retailers to operators such as Visa Europe Ltd. and MasterCard Inc. (MA) are “too high” and are under scrutiny, the European Union’s antitrust chief warned.

There isn’t “any indication” that card-transaction costs for retailers have decreased since 2006, EU Competition Commissioner Joaquin Almunia told a Brussels conference today, without naming specific bank-card companies.

Visa Europe, operator of the largest payment-card network in the 27-nation EU, is currently being investigated by regulators over fees it charges for cross-border credit-card and deferred-debit transactions after retailers said the fees were unfair. Visa Europe reduced similar fees for debit cards last year to settle an EU complaint from 2009. MasterCard settled a similar case by the commission in 2009.

Visa Europe in London declined to immediately comment on Almunia’s remarks. MasterCard, based in Purchase, New York, didn’t immediately respond to an e-mail seeking comment today.

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Courts

Sky Capital Founder Mandell Gets 12 Years in Prison for Fraud

Ross Mandell, founder of Sky Capital Holdings Ltd., was sentenced to 12 years in prison for operating what prosecutors alleged was an eight-year scheme that defrauded investors of $140 million.

Mandell, of Boca Raton, Florida, was found guilty in July of conspiracy, securities fraud, wire fraud and mail fraud --all the counts against him -- after a trial before U.S. District Judge Paul Crotty in Manhattan. At a hearing yesterday, Crotty also ordered Mandell to serve three years’ probation, pay a $10,000 fine and forfeit $50 million. Mandell, who is free on bail, must report to prison on June 18, Crotty said.

Mandell, 55, asked Crotty for mercy in sentencing him, saying that he and his family have suffered continuously since FBI agents raided Sky in November 2006. He told the judge he never intended to cheat anyone, blaming his conviction on false testimony by witnesses given in exchange for leniency.

Prosecutors accused Mandell and his co-defendants of using the money for personal expenditures including private jets, strip clubs, luxury hotels and expensive Swiss watches.

Adam Harrington, of Miami, a former broker at Sky Capital who was tried with Mandell, was convicted of the same four counts. He will be sentenced today.

The U.S. said the two solicited millions of dollars from victims for what they claimed were restricted stock offerings or private placements that promised large returns.

The case is U.S. v. Mandell, 09-cr-00662, U.S. District Court, Southern District of New York (Manhattan).

Legris, Comap Lose Court Challenges Over EU Antitrust Fines

Legris Industries SA and its former unit Comap SA lost challenges at the region’s highest court that sought to overturn European Union antitrust fines of 46.8 million euros ($61.6 million).

“Since all the arguments raised by Legris and Comap are inadmissible or unfounded, the Court dismisses the appeals of the two companies in their entirety,” The Luxembourg-based EU Court of Justice said in a statement on yesterday’s ruling.

Interviews/Hearings

Goodwin Says New York, London Centers of Entrepreneur Growth

Jonathan Goodwin, founding partner of Lepe Partners, talked about the Founders Forum and the appeal of New York and London for entrepreneurs.

The Founders Forum, a nonprofit organization, provides a series of annual global events for entrepreneurs and investors. Goodwin spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

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Paul Volcker to Testify at Senate Hearing Next Week

Former Federal Reserve Chairman Paul Volcker, a proponent of the Dodd-Frank Act proprietary trading ban that bears his name, is scheduled to testify next week at a U.S. Senate hearing in Washington.

Volcker and Federal Deposit Insurance Corp. Director Thomas Hoenig, a former Fed president, are set to appear at a May 9 Senate Banking subcommittee hearing on “limiting federal support for financial institutions,” Sean Oblack, a spokesman for the committee, said in an e-mail.

Swiss Re (SREN) Chairman Says ‘Coordinate’ Banking, Insurance Reforms

European reform of banking and insurance regulations, such as the Basel III and Solvency II initiatives, should strive for “coordination” rather than harmonization, Swiss Re Chairman Walter Kielholz said in a presentation in St. Gallen, Switzerland yesterday.

“One size fits all will probably lead to another crisis sooner rather than later,” he said.

To contact the reporter on this story: Carla Main in New York at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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