Hong Kong Exchange, CFTC Rule Gap, Basel III: Compliance

(Corrects currency conversion in Barclays item in Compliance Action.)

Hong Kong Exchanges & Clearing Ltd., (388) the world’s second-largest stock-market operator, is considering the reinstatement of a closing auction for equities to calm price swings, according to Gerald Greiner, its chief operating officer.

The Hong Kong bourse operator suspended the auctions in March 2009 after large moves at the end of the day spurred concern of price manipulation. Exchanges in most countries use auctions to set closing prices by pooling share orders and finding the level at which the most can be matched.

Hong Kong Exchanges is trying to regain its ranking as the world’s biggest bourse operator, a title it lost to CME Group Inc. (CME), and upgrade its trading systems amid global competition from alternative venues and as large initial public offerings from China slow.

The closing auction process, shunned only by Hong Kong and Shanghai among the 10 biggest markets worldwide, may reduce volatility and limit manipulation, according to a 2006 paper tracking the introduction of the process at Singapore’s stock exchange. International brokers and institutional investors have been asking Hong Kong to reinstate the auction, saying it reduces volatility and gives them more confidence in the closing price.

There is no timeline for the reintroduction of an auction, Greiner said.

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Compliance Policy

Gensler Calls for Closing Rules Gap Exposed by MF Global

The Commodity Futures Trading Commission should close a regulatory gap exposed by the collapse of MF Global Holdings Ltd. (MFGLQ) that lets futures brokers have less protection for customers’ funds in foreign accounts, said Gary Gensler, the agency’s chairman.

Under current regulations, brokers may use an alternative method for calculating how much margin to keep in accounts used for trading on foreign exchanges that can be less than the amount maintained for U.S. accounts. In the U.S., brokers must keep funds sufficient to handle the liquidation of an account.

The CFTC, the main U.S. derivatives regulator, has been debating changes to how customer accounts are maintained after MF Global collapsed leaving a $1.6 billion shortfall in client funds. The CFTC, Securities and Exchange Commission and Justice Department are investigating the failure of the company that was led by Jon S. Corzine, the former co-chairman of Goldman Sachs Group Inc. (GS) and a Democratic senator and governor of New Jersey.

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Basel Committee Publishes Capital Disclosure Rules

The Basel Committee on Banking Supervision published rules for capital disclosure, according to a statement on the website of the Bank for International Settlements.

The 30-page Composition of Disclosure details the steps and procedures the banks should take in order to implement the capital disclosure requirements of the Basel III Accords.

Basel III introduced the disclosure rules “to raise the quality and consistency of capital in the banking sector,” the committee said in the Composition of Disclosure.

The instructions cover subjects including the implementation date and frequency of reporting, disclosure templates and reconciliation procedures, according to the Composition of Disclosure.

U.S. Defense Department Plans Tougher Rules on Small Loans

The U.S. Department of Defense plans to strengthen rules designed to curb abusive lending to servicemembers as Congress considers changes to a 2006 law that regulates small loans, according to a senior military officer.

The Senate Armed Services Committee approved amendments to the Military Lending Act on June 6 as part of its annual review of defense policy, including one that would tighten the definition of payday loan to cover other high-interest products.

Congress passed the law in response to complaints from the Pentagon that so-called payday loans were often harmful for servicemembers and affected troop readiness. Advocacy groups, including the Consumer Federation of America, have argued that some lenders have evaded the law by redefining their products without lowering the interest rates.

Compliance Action

Barclays Fined by U.K., U.S. for False Libor Rates

Barclays Plc (BARC) was fined 290 million pounds ($451.4 million), the largest penalties ever imposed by regulators in the U.S. and U.K., after admitting it submitted false London and euro interbank offered rates.

Barclays Chief Executive Officer Bob Diamond and other executives will forgo their bonuses as a result, the bank said in a statement.

“The events which gave rise to today’s resolutions relate to past actions which fell well short of the standards to which Barclays aspires in the conduct of its business,” Diamond said in the statement.

The settlements with the U.K.’s Financial Services Authority, the U.S. Commodities Futures Trading Commission and U.S. Department of Justice come as regulators look into whether banks tried to manipulate Libor, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing, and whether traders colluded to rig the benchmark to profit from interest-rate derivatives.

Royal Bank of Scotland Group Plc, Citigroup Inc. (C), UBS AG, ICAP Plc, Lloyds Banking Group Plc and Deutsche Bank AG are among firms that are being probed by regulators worldwide.

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Nomura CEO Watanabe Apologizes for Insider Trading Role

Nomura Holdings Inc. (8604) Chief Executive Officer Kenichi Watanabe broke his silence on a government crackdown on insider trading, delivering his first personal apology over the company’s role in the probe.

Japan’s biggest brokerage will make sincere efforts to restore confidence, Watanabe told shareholders at an annual meeting in Tokyo today, according to investor Hideyuki Sakai, 41, who attended the private gathering.

Nomura spokeswoman Keiko Sugai confirmed the remarks.

Watanabe, 59, is under pressure to explain how employees leaked information ahead of share sales managed by Nomura in 2010 that third parties used for trading.

The CEO today declined to comment on the leaks, saying the company’s response depends on the outcome of an internal investigation, according to shareholders including Sakai, who has owned Nomura shares for about three years. Nomura has employed a group of outside lawyers to conduct its review, which it plans to complete by the end of the month.

About 1,852 shareholders attended the meeting, according to spokeswoman Sugai. That’s up from last year’s 1,554. As well as the insider trading issue, investors demanded an explanation for deteriorating profit, falling shares and dividend cuts.

Shareholders today approved the reappointment of executives including Watanabe, Sugai said.

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Ex-Kaupthing U.K. Unit Executives Accept FSA Limits After Probe

The former top executives of the U.K. unit of Kaupthing Bank hf agreed with Britain’s financial watchdog not to perform certain regulated work in the country for five years after a probe into its collapse.

The unit, Kaupthing Singer & Friedlander Ltd., would have faced fines if it weren’t insolvent, the Financial Services Authority said yesterday in a statement. Former Chairman Sigurdur Einarsson, former Chief Executive Officer Armann Thorvaldsson and an ex-director, Hreidar Mar Sigurdsson, agreed not to perform any “significant influence functions” requiring FSA approval for five years, dating from October 2008, the FSA said.

“The FSA has not made any findings of regulatory breach against them and they have not made any admissions,” the regulator said.

KSFL breached an FSA principle by assuming it could rely on a so-called special financing arrangement with its parent company in Iceland, under which it could draw as much as 1 billion pounds ($1.56 billion) at short notice “without testing that assumption,” the regulator said.

“The FSA considers KSFL’s failings to be serious as they occurred at a critical period for the financial markets and at a time when the FSA was particularly concerned to ensure it was fully informed about all banks’ liquidity,” the regulator said.

For-Profit Colleges Risk Losing Tax Money Under Debt Rules

For-profit colleges training security guards, medical assistants and law enforcement officers risk losing federal money because they leave students with debts they struggle to repay, the U.S. Education Department said.

More than 190, or 5 percent, of the career-training programs failed to meet new loan-repayment regulations, the government said. Career Education Corp. (CECO) and Corinthian Colleges Inc. (COCO) ranked among the worst schools on the agency’s list.

The Obama administration is seeking to protect taxpayers from loan defaults and stop students from taking on debt for degrees that don’t pay off with higher incomes. The industry lobbied against the proposed rules and said yesterday that it will reduce access for working adults and military veterans.

More than 90 percent of programs training security guards and medical assistants could become ineligible for funding. So could more than 80 percent of criminal justice programs.

The Education Department regulations give colleges until 2015 to improve their outcomes before they lose federal funding.

Career Education officials are analyzing the department’s information, said Mark Spencer, a company spokesman. Of 45 Corinthian programs violating the new standards, the company has moved to eliminate 13 and will address compliance issues at 11 others, said Kent Jenkins, a company spokesman. The rest will be able to comply using an alternative standard, he said.

Steve Gunderson, president of the Association of Private Sector Colleges and Universities, called the data underlying the new regulations “a faulty metric that does not accurately reflect the services provided by career colleges and universities.” In July 2011, the organization filed a lawsuit to block it.

Courts/Tribunals

Falcone Said to Face Lawsuit From Regulators Over Personal Loan

Philip Falcone, the billionaire hedge-fund manager whose largest investment went bankrupt after being blocked by regulators, now faces a showdown in court with the Securities and Exchange Commission.

Falcone, the 49-year-old founder of Harbinger Capital Partners LLC, may be sued by the regulator as soon as this week over claims he improperly borrowed client money to pay his taxes, according to two people familiar with the matter. He may also face claims that he gave preferential treatment to Goldman Sachs Group Inc., an investor in his fund, and manipulated markets when trading bonds of MAAX Holdings Inc., said the people, who asked not to be identified because the matter isn’t public.

The SEC voted to authorize enforcement staff to sue, the people said, after Falcone in 2009 took out a $113 million loan from his Special Situations fund to pay personal taxes. The loan was disclosed and later repaid. At the time of the borrowing, clients were barred from pulling money from the fund.

“Any allegations by the SEC of improprieties by Mr. Falcone or Harbinger are neither supported by the facts or the law,” said Matthew Dontzin, an attorney for Falcone. “Should a lawsuit be brought, it will be contested vigorously.”

Florence Harmon, a spokeswoman for the SEC in Washington, declined to comment.

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Telefonica Seeks Arbitrator After $1 Billion Mexico Damage Claim

Telefonica SA (TEF) is seeking international arbitration with Mexico’s government after failing to reach a settlement on its claim of $1 billion in damages from regulators’ decisions.

Telefonica, Mexico’s second-largest wireless phone carrier, filed for arbitration on June 21 before the World Bank’s International Centre for Settlement of Investment Disputes, according to the agency’s website.

The Spanish carrier has struggled to expand its 20 percent share of Mexico’s wireless market against billionaire Carlos Slim’s America Movil SAB (AMX), which has 70 percent of subscribers. In September, Telefonica told the Economy Ministry that Mexico’s actions violate the nation’s bilateral investment treaty with Spain. The company then calculated the damages at 14.7 billion pesos ($1.07 billion) “as of today,” according to the Sept. 7, 2011, document posted on the Economy Ministry’s website.

Telefonica and Economy Ministry officials had no immediate comment. International Arbitration Reporter reported the arbitration filing earlier.

The arbitration case is Telefonica SA v. United Mexican States, ARB(AF)/12/4, International Center for Settlement of Investment Disputes.

EU Regulator Can Sue Companies It Fined, Court Aide Says

The European Union’s antitrust regulator should be able to file a damages lawsuit against elevator makers it fined for illegal price-fixing, an EU court aide said.

The European Commission is suing Otis Elevator Co. and ThyssenKrupp AG, the world’s two largest elevator makers, and smaller rivals Kone and Schindler, for 7.1 million euros ($8.8 million) in damages in the Belgian courts because it said it purchased elevators and escalators for EU buildings at increased prices. The lawsuit is based on the EU’s own antitrust ruling that found the companies colluded to raise prices.

Advocate General Pedro Cruz Villalon, the legal adviser to the EU’s highest court, said the EU courts should handle any challenge to the regulator’s decision to fine the companies and national courts should “declare and quantify” damage suffered by the regulator as a customer, according to a court statement.

Antoine Colombani, a spokesman for the European Commission in Brussels, Martina Behrend, a spokeswoman for ThyssenKrupp in Essen, and Liisa Kivala, a spokeswoman for Kone in Espoo, Finland, declined to comment on the legal opinion. Otis and Schindler didn’t respond to e-mails seeking comment.

ThyssenKrupp, Germany’s biggest steelmaker and the world’s largest maker of elevators, was fined 479.7 million euros, reduced last year to 320 million euros on appeal. The commission fined Otis 224.9 million euros, Schindler 143.7 million euros and Kone 142 million euros in 2007.

While the advocate general’s opinion isn’t binding, it is followed by the European Court of Justice in the majority of cases. Final decisions on the case will be taken by the Brussels court.

The case is T-199/11 Otis and Others.

Interviews

Levitt on Failure to Save Glass-Steagall Bank Act

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and senior adviser to Goldman Sachs, said he “regrets not having fought sufficiently to retain Glass- Steagall.” Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Large Says BOE’s New Powers Need Not Overwhelm Policy Makers

Former Bank of England Deputy Governor Andrew Large said the expansion of the bank’s powers to include financial regulation may be manageable, and keeping them in a separate institution presents its own problems.

Large made the remarks in an interview in London yesterday.

Lawmakers are considering a new bill that will give the central bank tools to promote financial stability as it absorbs the Financial Services Authority’s oversight functions. The breadth of responsibilities led Labour Party lawmaker Ed Balls to say in April that the person who replaces Governor Mervyn King after he retires next year “will face a near-impossible task” to manage it all.

Chancellor of the Exchequer George Osborne said this month he will further expand the bank’s goals by making it a “legal requirement for the Financial Policy Committee to report, for every action it takes, how that action is compatible with economic growth as well as stability.” The panel will present the results of its latest policy meeting, and its semi-annual report on Financial Stability, on June 29.

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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