Swap Margins, New York Fed, SEC-Money Funds: Compliance

Banks and money managers will need to post $480 billion in new collateral to back swaps processed by clearinghouses under the Dodd-Frank Act, according to a Morgan Stanley analysis.

The firms would need to post as much as $1.3 trillion and as little as $20 billion of so-called initial margin, analysts led by Tiffany Wilding wrote in a note to Morgan Stanley clients yesterday. The demands will be mitigated by “unencumbered collateral” already at the firms, the fact that only new trades need to be cleared and that a range of assets from sovereign debt to corporate bonds can be used, they wrote.

Dodd-Frank requires most interest-rate, credit-default and other swaps to be processed by clearinghouses in an effort to cut counterparty risk after the $648 trillion privately negotiated market complicated efforts to resolve the financial crisis in 2008. Initial margin hasn’t always been required on swaps trades outside clearinghouses.

The new regulations also require swaps that can’t be processed by a clearinghouse to be backed by collateral.

“We estimate this market is approximately $170 trillion in size, which implies significantly greater potential incremental” margin growth, the analysts wrote. They said they would estimate the amount needed to back non-cleared swaps in a future report.

Compliance Policy

SEC Money-Fund Talks Included Proposal to End Outflows in Crisis

U.S. Securities and Exchange Commission Chairman Mary Schapiro, who said she couldn’t get fellow commissioners to agree to tighten money-market fund rules, rejected an alternative that would give funds authority to halt or limit withdrawals in times of crisis, according to a person with direct knowledge of the discussions.

Schapiro said in a statement Aug. 22 that she canceled a vote on her plan to give funds the choice of switching to a floating share price or establishing a capital buffer with redemption restrictions. She said three of the five commissioners told her they wouldn’t support the idea.

At least two commissioners previously made a counterproposal that would allow firms running money funds to stop investor flight, similar to how hedge funds operate, said the person, who spoke on condition of anonymity because the talks have been private. The so-called gating proposal also would have required additional disclosure to investors about the risks of putting money in the funds, the person said.

The chairman also rejected an idea posed by Commissioner Luis Aguilar, one of the three standing against the proposal, to issue a so-called concept release to gather public comments on money-fund oversight instead of formally proposing changes, the person said.

For more, click here and see Levitt interview, below.

Ontario Securities Commission Seeks Comment on Proposed Fee Plan

The Ontario Securities Commission published a draft of its proposed fee model and is seeking comment on the plan.

The proposed changes are intended to provide the commission with more resources to meet increasing regulatory operations, according to an e-mailed statement.

Biggest Turkish Pension Fund Sees Fee Cap Lifting Savings

Turkey’s biggest provider of pensions said proposed rules slashing fees that fund managers charge their clients will encourage Turks to save more, lifting an obstacle to the country winning investment-grade status.

Anadolu Hayat Emeklilik AS (ANHYT), which manages $1.7 billion, expects the rules, poised to slash charges from as much as 8 percent annually, will boost its pension’s pot in the long run, deputy chief executive Mine Kumcuoglu said. Moody’s says Turkey’s savings rate of 12 percent of gross domestic product, compared with China’s 53 percent, makes the economy vulnerable to foreign-capital outflows. Local-debt yields of 7.66 percent are the highest among major emerging markets after Brazil.

Turkey must fund economic growth either with savings or money from abroad. Investor concern that the country may be too reliant on foreign inflows was heightened last year as consumer borrowing rose 40 percent and an import boom lifted the current- account deficit to a record $77 billion, or 10 percent of GDP.

The Treasury is proposing a law reducing management and entrance fees charged by private pension companies, which Kumcuoglu and Ata Invest analyst Faith Tugrul Topac say will take effect by early 2013.

For more, click here.

Compliance Action

HSBC in Settlement Talks with U.S on Money-Laundering Probe

HSBC Holdings Plc (HSBA), which is under investigation by U.S. regulators for laundering funds of sanctioned nations including Iran and Sudan, is in talks to settle the matter, two people with knowledge of the case said.

The bank, Europe’s largest by market value, made a $700 million provision in July for any U.S. fines after a Senate Committee found it had given terrorists and drug cartels access to the U.S. financial system. That sum might increase, Chief Executive Officer Stuart Gulliver has said.

An HSBC settlement regulators and the Manhattan District Attorney were aiming to conclude as early as September may have been slowed when New York’s banking superintendent accused Standard Chartered of laundering $250 billion for Iran. Regulators had been talking with both banks about universal accords when Benjamin Lawsky on Aug. 6 threatened to revoke Standard Chartered’s license. Deals with the London-based banks next month are still possible, said the people, who asked not to be identified because the investigations are confidential.

“This is an epidemic of banks willfully, consistently violating economic sanctions,” Jimmy Gurule, a former undersecretary for enforcement at the U.S. Treasury, said of sanctioned-nation money laundering. “It calls for more serious sanctions than a monetary fine for an individual bank that does nothing more than harm shareholders.”

HSBC’s $700 million set-aside, if paid, would constitute the largest U.S. settlement reached over such allegations, topping the $619 million in penalties and forfeitures paid in June by ING Groep NV, the biggest Dutch financial-services company. Standard Chartered agreed on Aug. 14 to pay $340 million to settle the New York state matter, an accord that broke a previous pattern of resolving all such U.S. probes at once in a unified agreement.

For more, click here.

Citigroup Urges SEC to Block Nasdaq’s Facebook Payout Plan

Citigroup Inc. (C), whose market-making unit suffered millions of dollars of losses trading Facebook Inc. (FB) in its public debut, urged U.S. regulators to reject Nasdaq OMX Group Inc. (NDAQ)’s proposal to make up for its errors.

The third-biggest U.S. bank said New York-based Nasdaq OMX’s claims that its liability should be limited by immunity afforded to exchanges is unsupported by legal precedent. Decisions made by the second-largest U.S. equity trading venue in the May 18 initial public offering were aimed at protecting its profits rather than member firms, the company said.

Citigroup’s assertions, contained in a 17-page letter to the Securities and Exchange Commission, came one day after rival market-maker Citadel LLC said Nasdaq OMX’s proposal should be approved. The New York-based bank said its losses exceed its portion of the pool proposed by Nasdaq OMX last month, which would compensate Wall Street firms that lost money after a design flaw in its computers delayed Facebook’s open and left traders confused about how many shares they owned.

“Market participants suffered hundreds of millions of dollars of losses as a result of Nasdaq’s profit-driven conduct prior to and during the Facebook IPO, not as a result of protected regulatory activity by Nasdaq, or routine system failures,” Citigroup wrote. “Nasdaq should not be permitted to hide behind regulatory immunity.”

Joseph Christinat, a Nasdaq OMX spokesman, declined to comment.

The opposition is another sign Nasdaq’s responsibility will be determined in court rather than by regulators. UBS AG (UBSN), Switzerland’s largest bank, said last month that it is examining legal options after losing as much as $350 million in the IPO.

For more, click here.

New York Fed Unloads Last Debt From AIG’s 2008 Rescue

The Federal Reserve Bank of New York’s role in the $182.3 billion rescue of American International Group Inc. (AIG) has ended on a high.

The central bank sold $3.4 billion in toxic mortgage debt yesterday that it inherited four years ago when it bailed out AIG, once the world’s largest insurer. The assets were the last batch from its Maiden Lane III LLC portfolio created to purchase $62.1 billion of collateralized debt obligations tied to risky residential- and commercial-mortgage securities that helped sink AIG when property markets tumbled.

The New York Fed’s management of Maiden Lane III will result in a cumulative net gain to the public of about $6.6 billion, the district bank said yesterday in a statement.

Yesterday’s sale “marks the end of an important chapter, our assistance to AIG, that was undertaken to stabilize the financial system in the midst of the financial crisis,” William Dudley, president of the New York Fed, said in the statement.

Joe Norton, a spokesman for New York-based AIG, declined to comment yesterday.

For more, click here.

Nasdaq Says Some Short Orders May Have Broken 10% Rule, WSJ Says

Nasdaq said that an unspecified number of orders may have broken the U.S. Securities and Exchange Commission’s alternative uptick rule, the Wall Street Journal reported.

The rule, which limits bearish bets on stocks that are already down significantly, is triggered after a stock drops 10 percent in one day, the Journal said.

Interviews

Levitt Says SEC Money-Fund Punt a ‘National Disgrace’: Tom Keene

U.S. Securities and Exchange Commission Chairman Mary Schapiro’s abandonment of her quest to impose tougher rules on money-market mutual funds is a “national disgrace,” said former SEC Chairman Arthur Levitt.

“There’s clearly a need to do something about money-market funds,” Levitt, 81, said yesterday in a Bloomberg Radio interview with Tom Keene and Ken Prewitt. “Everything else is marked to the market. This should be marked to the market in the interest of investors. The fact that Mary Schapiro couldn’t get her three members of the commission to support this is really a national disgrace.”

Three of the four other SEC commissioners didn’t support a four-year effort to make money funds more stable, Schapiro said in a statement that urged other policy makers to take action. That could move the fight over regulating the funds to the Financial Stability Oversight Council.

“This is a national issue,” Levitt said. Protecting investors “is a matter that the president should weigh in on. The Federal Reserve Board took that position. The Treasury Department is supportive of money-market regulation.”

Schapiro has worked to make money funds safer since the collapse of the $62.5 billion Reserve Primary Fund in September 2008.

For more, click here, and see Compliance Policy, above.

For the video, click here.

To contact the reporters on this story: Carla Main in New Jersey at cmain2@bloomberg.net; Ellen Rosen in New York at erosen14@bloomberg.net

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

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