Market-Abuse Jail, Money Fund Risks: Compliance

European Union lawmakers backed punishments for market abusers, including jail time, in a bid to prevent any repeat of the scandal engulfing Libor and other interbank lending rates.

Members of the European Parliament’s economic and monetary affairs committee called for courts to be able to impose prison terms on people found guilty of egregious cases of insider dealing and market manipulation. The lawmakers also backed the use of fines and other administrative sanctions against traders who unsuccessfully try to rig the market.

Confidence in Libor, the benchmark interest rate for more than $360 trillion of securities, was shaken following Barclays Plc’s (BARC) admission in June that it submitted false rates. The revelations provoked renewed calls for tougher oversight of the financial system and pushed regulatory and criminal probes of Libor and other interbank lending rates to the top of the political agenda.

European Union Financial Services Commissioner Michel Barnier last year proposed the upgrade to the bloc’s sanctions against market abuse. He updated the plans in July to ensure that they would cover abuse of Libor and other benchmarks.

Barnier has called for the law to be approved this year to boost confidence following the Libor revelations.

The measures must be agreed on by the parliament and by a weighted majority of the region’s national governments before they can take effect. Yesterday’s vote sets out the assembly’s negotiation position on the draft law.

Compliance Policy

Money-Market Funds Should Have Risk Limitations, IOSCO Says

Money-market funds should have limits imposed on the riskiness of their investments and should conduct regular stress tests, a global body of markets regulators said.

“Funds should not take direct or indirect exposures to equities or commodities,” the International Organization of Securities Commissions said in a report on its website yesterday. The funds, which invest in short-term debt, should hold buffers of liquid assets to prevent runs, IOSCO said.

While reform steps have been taken, “These funds may still present vulnerabilities which could have broader consequences for the financial system,” IOSCO said in the report.

Regulators have pressed to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run and helped freeze credit markets. The crisis calmed only after the U.S. Treasury guaranteed shareholders against losses.

Money-market funds have about $4.7 trillion under management and make up a significant part of the so-called shadow-banking industry. The recommendations from IOSCO include increased disclosure to investors of how funds value their investments and how they would act in times of financial stress.

Regulators should be able to stop outflows in “exceptional situations,” which “may have implications for the broader financial system,” according to the report.

Yesterday’s report was backed by all members of IOSCO aside from a “majority of the Commissioners of the U.S. Securities and Exchange Commission,” IOSCO said in the statement.

Mary Schapiro, chairman of the a U.S. Securities and Exchange Commission, gave up on a plan in August to strengthen regulation of the funds after three of the agency’s five commissioners told her they wouldn’t vote to issue it for public comment.

EU Banking Plan Founders on Criticism From Non-Euro Nations

European efforts to pave the way for direct bank bailouts have foundered because of concerns that current plans to build a euro-area bank supervisor would hurt nations outside the common currency.

New proposals are more explicit about how the European Central Bank should coordinate with national supervisors once joint oversight is in place, according to a document prepared by the Cypriot presidency of the European Union and obtained by Bloomberg News.

The compromise Cypriot text would require the ECB to share information with local authorities and coordinate closely on issues that could involve the prospect of closing a bank. It says non-euro nations who choose to join the bank oversight regime could leave upon request at any time.

These concessions aren’t enough to reassure countries outside the 17-nation euro area that their interests will be protected, ministers from Denmark and Sweden said yesterday.

Finance ministers in Luxembourg acknowledged that the EU is unlikely to launch the new oversight regime by the start of 2013 as initially hoped.

For more, click here.

ECB Weighs Options to Give Non-Euro Nations More Voice

European Central Bank official Ignazio Angeloni said that options are being weighed to give nations outside the euro area more of a voice in supervisory decision making, if they agree to sign up for shared oversight of lenders.

Angeloni made the remarks during an event in Brussels at the European Parliament.

Among the options being considered is the inclusion of voting rights on the planned supervisory board at the ECB.

Compliance Action

Finra Says Firm Reviewing Cancellations After Sudden Swings

A firm that reported equity trades away from prevailing market prices early yesterday is studying them to see if they should be voided, according to the Financial Industry Regulatory Association.

The transactions were sent to data feeds over the Finra/Nasdaq Trade Reporting Facility, a conduit for equity prices from off-exchange venues such as dark pools. The firm, which Finra didn’t identify, is “reviewing the trades to determine whether corrections or cancellations” are warranted, according to a statement from Finra spokeswoman Nancy Condon.

While most of the shares that were bought and sold in America changed hands on three main markets until the late 1990s, trading now is fragmented across more than 50 public and private venues as well as among brokers who match orders through a process known as internalization. About 140 stocks quoted on the Finra facility swung over a one-hour period starting around 10 a.m. in New York, data compiled by Bloomberg show.

Prices rose and fell abruptly as isolated trades carried out away from equity exchanges spurred concern about computer errors. Some of the trades have been canceled.

The stock swings are the latest incident to draw attention to the electronic infrastructure of U.S. markets. Regulators are studying ways to prevent electronic mishaps after a programming error almost sent Knight Capital Group Inc. into bankruptcy in August.

Yesterday’s anomalies differed from the Aug. 1 Knight incident because Knight’s orders landed on exchanges and were executed against tens of thousands of shares. Yesterday’s were confined to venues that report prices through a facility overseen by Finra and in most cases resulted in only hundreds of shares changing hands, according to data compiled by Bloomberg.

Richard Adamonis, a spokesman for NYSE Euronext, declined to comment. Robert Madden, a spokesman for Nasdaq OMX Group Inc., declined to comment.

Financial Watchdog Relaxes Capital Rule to Spur U.K. Lending

The Financial Services Authority relaxed the amount of funds U.K. banks must keep in reserve, in an effort to spur lending and stimulate credit growth.

“No bank will be required to hold the additional” capital reserves that would have been needed previously for an increase in lending, the FSA said in a Sept. 27 statement on its website.

“There are prudential and financial stability benefits to taking proportionate action to enable firms to support the supply of credit to the economy,” the FSA said.

U.K. lenders including Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Barclays Plc rose in London trading.

The relaxation in capital rules will apply to all U.K. banks, whether or not they participate in the Bank of England’s Funding for Lending plan, which provides 60 billion pounds ($96 billion) backing for new loans, the FSA said.

Liam Parker, a spokesman for the FSA in London, declined to comment today.

Total Raises Accuracy Concern About Oil Price Reporting Agencies

Total SA (FP), France’s largest oil company, said it is concerned that inconsistency and a reliance on judgment calls hinders the accuracy of price reporting agencies in reflecting the state of the oil market.

Totsa, the Geneva-based trading arm of Total, made the remarks in an Aug. 24 letter to the International Organization of Securities Commissions, which was published on IOSCO’s website on Oct. 5.

The company said that excluding market participants from the assessment process, or “boxing,” by price reporting agencies, can have “significant economic consequences both on the prices assessed in the market and on the company concerned.”

IOSCO was appointed by the Group of 20 nations in November to investigate the role played by price reporting agencies in oil markets and published its final report on Oct. 5. The report, which called for the agencies to adopt “robust” controls to protect the reliability of the benchmarks, stopped short of recommending new rules for traders or trading companies.

Bloomberg LP, the parent of Bloomberg News, competes with Platts and Argus in providing energy markets news and information.

Courts

Trading-Limit Appeal May Get CFTC Vote as Soon as This Week

The U.S. Commodity Futures Trading Commission may decide as soon as this week to appeal a judge’s ruling against trading limits for oil, natural gas and other commodities, according to two people briefed on the matter.

The five-member commission plans to vote following a recommendation from the agency’s general counsel’s office to appeal the ruling, according to the people, who spoke on condition of anonymity because the schedule is private. A U.S. District Court ruling Sept. 28 found that the CFTC failed to assess whether the limits imposed under the Dodd-Frank Act were necessary and appropriate.

The decision blocked rules scheduled to take effect Oct. 12 that were challenged by the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association Inc.

Steven Adamske, the CFTC’s spokesman, declined to comment.

Bart Chilton, one of three Democrats on the commission, has urged the agency to appeal the ruling.

The case is International Swaps and Derivatives Association v. U.S. Commodity Futures Trading Commission, 11-02146, U.S. District Court, District of Columbia (Washington).

Alcoa Settles Aluminium Bahrain Lawsuit for $447 Million

Aluminium Bahrain BSC said Alcoa Inc. (AA), the largest U.S. aluminum producer, agreed to pay $447 million to settle a racketeering lawsuit that claimed it overcharged for materials after bribing senior company officials and the government in Bahrain.

The settlement will be realized in a combination of cash and a long-term alumina sales agreement, Aluminium Bahrain, known as Alba, said in a statement received by e-mail yesterday. The settlement, which included no admission of liability, resulted in the release of all claims against Alcoa and related defendants, Alba said.

Alcoa said yesterday in a statement that it agreed to pay Alba $85 million in cash in two installments. The company also said in the statement that the settlement with Alba represents the best possible outcome and avoids the time and expense of complex litigation.

The U.S. Department of Justice and Securities and Exchange Commission have been investigating the allegations since 2008 to determine whether Alcoa or anyone else violated the U.S. Foreign Corrupt Practices Act.

Bahrain Mumtalakat Holding Co. BSC, the investment arm of Bahrain’s government, owns 69.4 percent of Alba, data compiled by Bloomberg show.

Interviews

EU’s Barnier Says Bank Oversight Plan Needs Improvement

European Union Financial Services Commissioner Michel Barnier, Economic and Monetary Affairs Commissioner Olli Rehn and Tax Commissioner Algirdas Semeta spoke at a news conference in Luxembourg on proposals for a financial transaction tax and common bank oversight.

Cypriot Finance Minister Vassos Shiarly also spoke.

For the video, click here.

Comings and Goings

SEC Watchdog Cites Report as Proof He’s Not a Security Threat

David Weber, a U.S. Securities and Exchange Commission internal watchdog who was put on leave after co-workers accused him of being a security threat, asked to be reinstated after an independent review indicated the claims were unsubstantiated.

Weber took over as chief investigator of the SEC’s inspector general’s office last year and was put on leave in May.

Weber stepped into the fray in March when he reported to the SEC commissioners that H. David Kotz, the agency’s former inspector general, may have had a personal relationship that tainted reports on the agency’s failure to catch the Bernard Madoff and R. Allen Stanford Ponzi schemes.

A number of Weber’s co-workers submitted complaints that he was creating a hostile work environment. The SEC used an external security consultant to review whether Weber was a threat and then placed him on administrative leave.

An outside review generated by Weber’s complaints found that Kotz appeared to have conflicts of interest in two matters, and didn’t unearth any evidence to indicate that Weber’s conduct raised security concerns, according to the probe’s final report.

Weber’s attorney, Cary J. Hansel, said his client is prepared to file a lawsuit alleging the agency retaliated against him for reporting the issues.

Kevin Callahan, an SEC spokesman, didn’t respond to a phone call and e-mail seeking comment.

Bowles Vies for King’s Job to Break Bank of England From Past

European lawmaker Sharon Bowles said that diplomacy and knowledge of banking regulation are strengths she can offer to support her candidacy to become the first female governor in the Bank of England’s 318-year history.

Bowles, 59, said in an interview in Brussels yesterday that she put in her application to replace Mervyn King on Oct. 7, the day before Chancellor of the Exchequer George Osborne’s deadline. Bowles is chairwoman of the European Parliament’s Economic and Monetary Affairs Committee and a member of the Liberal Democrats, Prime Minister David Cameron’s coalition partners.

The deadline for candidates was Oct. 8 at 8:30 a.m. in London. Goldman Sachs Asset Management Chairman Jim O’Neill, former U.K. civil service chief Gus O’Donnell and former Bank of England policy maker DeAnne Julius have all said they didn’t submit applications.

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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