ASIC ‘Kill Switch,’ EU Bank, Russia Tobacco: Compliance

Australian regulators are considering requiring all trading algorithms to have an inbuilt “kill switch” to immediately disable them if they malfunction, Australian Securities and Investments Commission Chairman Greg Medcraft said at a conference in Sydney.

ASIC is also pondering a mandate that any trades done through a dark pool, an off-exchange venue that doesn’t display prices or the identity of buyers and sellers, have meaningful price improvement from public platforms, Medcraft said. Australia’s latest consultation paper on electronic trading closed for comments Sept. 14. Final rules are expected this month.

Electronic trading has come under scrutiny globally after the practice was blamed for a May 2010 incident in which the Dow Jones Industrial Average briefly lost almost 1,000 points in less than 20 minutes. Traditional exchanges worldwide are losing market share to dark pools and other alternative venues.

Regulators plan to require any trades through dark pools obtain a better price than lit, or public, venues by at least one tick size or that they occur at the midpoint between bids and offers, Medcraft said. ASIC planned to lower the threshold for block trades from A$1 million ($1 million) to A$200,000, he said.

In March, 16.4 percent of Australian trading went through dark pools, with an additional 13.2 percent trading in blocks of larger than A$1 million away from the exchange, according to ASIC statistics e-mailed to Bloomberg.

The smaller size of Australia’s market means it’s more vulnerable to fragmentation and off-exchange trades, ASX Ltd. (ASX), Australia’s main bourse operator, said on Aug. 6 in response to the market-structure consultation.

U.S. regulators are also mulling kill switches.

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Compliance Policy

EU May Back Delay on Bank-Liquidity Rule Detail in Basel Law

The European Commission is urging legislators to postpone their demands for detailed rules on bank liquidity amid concerns they might increase market pressure on lenders and cut interbank lending.

The commission has made the proposal to help broker a deal on the European Union’s implementation of global bank rules before a January deadline. European Parliament members have so far insisted on inserting precise liquidity rules in the law to apply the standards -- a prospect that has raised concerns among governments and central banks.

A less detailed approach in the draft law would have “major advantages,” according to the note drawn up by commission officials for lawmakers working on the dossier, and obtained by Bloomberg News. It’s “less risky, less susceptible to harmful pressure from the markets and rating agencies.”

The EU has struggled to agree on how to implement the revised global rulebook for banks, which was drawn up by regulators in the Basel Committee on Banking Supervision.

The liquidity standard, called a liquidity coverage ratio, or LCR, is scheduled to apply from 2015, and would require banks to hold enough easy-to-sell assets to survive a 30-day funding squeeze.

Michel Barnier, the EU’s financial services chief, said Oct. 9 that an accord is possible by the end of this month.

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Separately, Barnier said the bloc is close to a deal on the capital charges that should apply to bank loans to small businesses.

Cigarette Makers Wage Final Battle to Tame Russian Smoking Bill

Cigarette makers including Philip Morris International Inc. (PM) and British American Tobacco Plc (BATS) are fighting a last-ditch battle against a smoking crackdown in Russia, with three weeks left to change the government’s mind.

Russia should scale back the proposal that would ban smoking in public places, tobacco sponsorship and cigarette sales in kiosks, Alexander Shokhin, the head of the Union of Industrialists, a lobby group for big business, said Oct. 9. Government legal advisers in August reversed their original approval of the anti-tobacco bill, recommending changes to the planned measures.

Russian President Vladimir Putin wants to curb smoking and alcohol consumption to stem the country’s population decline. Thirty-nine percent of the 143 million people in Russia, the world’s largest tobacco market behind China, are habitual smokers according to the World Health Organization. That compares with 28 percent in China and 27 percent in the U.S.

The government is due to submit the bill to lawmakers by Nov. 1, outlawing all cigarette advertising and sponsorship immediately, with the bans on kiosk sales and smoking in public places taking effect Jan. 1, 2015. The government is expected to resist pressure to weaken the proposal.

Philip Morris, the world’s largest publicly traded tobacco company and BAT, Europe’s biggest cigarette maker, generate about a third of global sales in Eastern Europe, Africa and the Middle East. Japan Tobacco Inc. (2914) relies on the region encompassing Russia, the other ex-Soviet states

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Japan’s FSA May Raise Cap on Banks’ Holdings, Nikkei Says

Japan’s Financial Services Agency is considering a cap of 10 to 15 percent as the limit on banks’ holdings of non- financial companies, up from the current 5 percent, Nikkei reported.

The proposal aims to counter the impact of the March 2013 expiration of laws encouraging loans to small and midsized companies and includes keeping the cap below 20 percent, according to Nikkei. The 10 percent ceiling for credit associations and cooperatives would be unchanged.

The proposal was discussed yesterday at a meeting of the financial advisory council to the prime minister, Nikkei reported.

Consumer Groups Ask CFPB to Scrap Mortgage Rules as Inadequate

A coalition of groups supporting tougher financial regulations has asked the Consumer Financial Protection Bureau to scrap its proposed revamping of mortgage rules over what it called inadequate safeguards for borrowers.

“Major improvements in these areas are needed -- including withdrawing and re-issuing a proposal if that is necessary in order to make the major changes required,” Americans for Financial Reform wrote in a letter to the agency on Oct. 9, the last day of a public comment period on the proposal.

The bureau plans to issue final regulations in January. Richard Cordray, the CFPB’s director, on Aug. 10 proposed the rules for mortgage servicing that he summed up as “no surprises and no runarounds.”

One set of rules is intended to provide homeowners with clearer, timelier information about changes to interest rates and options for avoiding foreclosure. A second set requires servicers to credit payments promptly, correct errors, stay accessible and limit foreclosures if homeowners are working on loan modifications.

The rules would cover major bank servicers, such as Charlotte, North Carolina-based Bank of America Corp. and San Francisco-based Wells Fargo & Co. (WFC), as well as non-depository companies such as Ocwen Financial Corp. (OCN), based in West Palm Beach, Florida.

Tension has arisen between advocates of greater disclosure for consumers and those who seek to reform mortgage providers.

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Compliance Action

U.S. Swaps Relief for Forex Traders Said to Be Weighed by CFTC

Financial firms that predominantly trade foreign-exchange swaps are poised to gain a temporary reprieve from Dodd-Frank Act rules scheduled to take effect this week, according to a person with direct knowledge of the regulatory process.

Companies with foreign-exchange derivatives business that pushes them above the $8 billion swap-dealer threshold starting on Oct. 12 wouldn’t be required to register with the U.S. Commodity Futures Trading Commission until after the end of the year, said the person, who spoke on condition of anonymity because the discussions are ongoing.

Dodd-Frank, the 2010 financial-regulation overhaul, gives the Treasury Department authority to exempt foreign-exchange swaps and forwards from most of the law’s clearing and trading regulations. Treasury, which has already proposed an exemption, plans to complete the decision by the end of the year, Alastair M. Fitzpayne, assistant Treasury secretary for legislative affairs, said in an Oct. 4 letter to Representative Barney Frank, a Massachusetts Democrat.

The CFTC, which oversees derivatives markets, may issue “no-action” letters to ease the compliance burden for traders whose predominant business is foreign exchange.

OFT Says It May Move on Airlines That Don’t Show Debit-Card Fees

The U.K.’s Office of Fair Trading said it may take action against airlines that don’t include debit-card surcharges in their advertised prices.

The government office made the comment in a statement on its website yesterday.

Ryanair Holdings Plc (RYA) and EasyJet Plc (EZJ) were among airlines that pledged to stop charging extra fees for card payments, the OFT said in July.

Barclays Ends Sales-Based Bonuses for Consumer Bank Employees

Barclays Plc (BARC)’s consumer unit will stop awarding bonuses to employees based on sales and instead focus on customer satisfaction as Chief Executive Officer Antony Jenkins attempts to bolster the lender’s reputation.

Britain’s second-largest bank by assets will hire a company to poll customers on the quality of their experience and use the data to decide bonuses, Emma Austin, a spokeswoman for London- based Barclays, said by telephone today. About 18,000 U.K. workers in the division were told yesterday of the plan, which takes effect Dec. 1.

Jenkins said last month that employee performance will be measured against the firm’s values as well as financial achievement as part a plan to overhaul the bank’s culture following a number of banking scandals. British regulators said last year that consumers may receive as much as 9 billion pounds ($14.4 billion) in industrywide compensation as a result of improper sales of loan insurance. Incentive programs for employees are likely to encourage people to mis-sell to meet targets and receive bonuses, the Financial Services Authority said last month, following a review of 22 firms.

Courts

Reserve Fund Lied About Losses on Lehman, SEC Lawyer Tells Jury

Reserve Primary Fund, the failed $62.5 billion money-market fund, misled shareholders about the safety of its fund after it lost money on Lehman Brothers Holdings Inc. debt, a government lawyer told a jury.

Reserve, which held $785 million in Lehman debt, caused a run on money-market funds after its net asset value fell below $1 a share on Sept. 16, 2008, the day after Lehman filed the biggest bankruptcy in history. The failure of Reserve, the first money fund in 14 years to “break the buck,” contributed to the global financial crisis.

The U.S. Securities and Exchange Commission sued Reserve, founder and Chief Executive Officer Bruce R. Bent and his son, President Bruce Bent II, in May 2009. The SEC accuses the Bents of violating federal securities laws by making misleading statements to investors and trustees in the run-up to the collapse of the fund.

SEC lawyer Nancy Brown told a nine-person jury in her opening statement that the Bents lied on the morning after Lehman announced its bankruptcy, falsely telling investors, regulators and the fund’s trustees that they would use money from their firm, Reserve Management Co., to support the $1 net asset value of fund shares.

The commission seeks disgorgement of unspecified ill-gotten gains, a civil fine and an order barring the defendants from violating the securities laws in the future.

John Dellaportas, a lawyer for the Bents and the company, told jurors in his opening statement that his clients didn’t lie or defraud investors.

He said the trial is about a 12-hour period when Lehman filed for bankruptcy and the Bents decided they didn’t have enough money to cover a $785 million shortfall. He told the jury that both Bents will testify and explain what occurred and what they were thinking during these two days.

The case is SEC v. Reserve Management Co. Inc. 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).

Interviews

AMF’s Rameix Says France Needs Shareholder Vote on Pay

Gerard Rameix, president of the Autorite des Marches Financiers, discusses executive pay packages, corporate governance and the possible impact of a financial-transaction tax.

He speaks from Paris with Mark Barton on Bloomberg Television’s “Countdown.”

For the video, click here and click here.

Dimon Not Sure JPMorgan Would Rescue Bear Stearns Again

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said his bank did the U.S. a favor by buying Bear Stearns Cos. in 2008 and he might not go through with it again because of how much the deal ultimately cost.

He spoke yesterday in Washington at an event held by the Council on Foreign Relations.

For the video, click here.

Separately, Dimon said the U.S. didn’t get the overhaul of its banking system right with Dodd-Frank.

“We have to get rid of too big to fail,” Dimon added. The U.S. “should allow orderly bankruptcy for large banks,” he said.

Levitt Says Facebook IPO Will Alter Future Offerings

Arthur Levitt, former U.S. Securities and Exchange Commission chairman, said the SEC “is going to take a look” at the initial public offering process after Facebook (FB)’s IPO. Levitt talked with Bloomberg’s Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” They were joined by Bloomberg economist Joseph Brusuelas.

For the audio, click here, and click here.

Comings and Goings

IRS Commissioner Douglas Shulman Sets Nov. 9 Departure Date

Douglas Shulman, the commissioner of the U.S. Internal Revenue Service, will leave his job Nov. 9, the agency said yesterday in Washington.

Shulman, 45, had announced his intention to leave office when his term expires. He became commissioner in March 2008.

Steven Miller, a deputy commissioner, will become acting commissioner.

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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