EU Solvency II Split, HP Probe, CFTC-Pensions: Compliance

The European Union’s 12-year push to introduce a common set of rules for the region’s insurance industry is close to being sidelined as some of the biggest member states prepare to introduce the regulations piecemeal.

Lobbying by German, British and French insurers over the impact of the rules on long-term savings products has already delayed the introduction of Solvency II beyond its original start date of this year. The regulations, designed to make firms across the region allocate the same capital reserves against the risks they take, may not come into force before 2016, according to executives as they reported third-quarter earnings.

European insurers met in Frankfurt Nov. 21 as regulators in Germany and the Netherlands continue to weigh whether to introduce parts of the rules themselves, jeopardizing European attempts to create a level playing field. Policy makers are also questioning Solvency II’s use of insurers’ own risk models, a method used by banks that helped trigger the financial crisis.

European policy makers intended Solvency II to be for insurers what the Basel Committee on Banking Supervision’s capital rules are for banks: a common set of rules across the EU. They will replace regulations developed in the 1970s that had been superseded by a patchwork of national laws.

Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority, urged European political institutions to implement Solvency II.

Solvency II is made up of three key parts, or pillars: capital requirements for individual companies, a regulatory assessment of a particular firm’s risk, as well as the regulator’s broader supervision of the marketplace.

EU lawmakers rescheduled a plenary vote needed to agree on capital requirements to March 11 from Nov. 20. German, British and French insurers have criticized the proposals, saying they will make it costlier to sell savings products with guaranteed long-term returns.

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Compliance Policy

CFTC Eases Swap Pay-to-Play Rules With Government Pension Plans

Wall Street banks have been freed from Dodd-Frank Act limits on political contributions intended to limit fraud in swaps with government pensions.

The Commodity Futures Trading Commission, the main U.S. derivatives regulator, said in a letter Nov. 20 that it would not enforce so-called pay-to-play restrictions on banks selling swaps to the pensions. The restrictions apply to dealers that have made political contributions to municipal officials in the two years before a trade.

The CFTC said its decision was intended to harmonize limits on political contributions from the Securities and Exchange Commission and Municipal Securities Rulemaking Board. The CFTC said in the letter that it acted after industry participants said they would need to “expend significant resources to update their current policies and procedures to ensure compliance.”

The Dodd-Frank business conduct standards were completed in January and were intended to protect less-sophisticated customers in swap trades with banks. Lawmakers in the Dodd-Frank Act called for regulators to crack down on abuses in the sales of derivatives to states, cities and school districts after municipalities lost billions of dollars on interest-rate swaps during the 2008 credit crisis.

The CFTC also said the two-year waiting period restriction won’t apply to contributions made before the end of the year. Banks won’t need to register their swap-dealing units until Dec. 31 at the earliest.

Separately, the CFTC will hold an open meeting in Washington on Nov. 29 to consider the clearing requirement determination, according to a statement on the agency’s website. The proposed regulation would require that certain classes of credit default swaps and interest rate swaps be cleared by a derivatives clearing organization registered with the agency, according to an Aug. 7 notice in the Federal Register.

Compliance Action

TMX Sees Dodd-Frank Pushing Debt to Exchanges, Kloet Says

TMX Group Ltd. (X), owner of Canada’s equity and derivatives exchanges, will expand its offerings of fixed-income products as regulations drive trading to public markets, Chief Executive Officer Thomas Kloet said.

The new products are likely to be helped by the Dodd-Frank law in the U.S. and other regulations designed to reduce risk and increase trading transparency after the 2008 global financial crisis, Kloet said in an interview at Bloomberg’s Toronto office. The regulations create “enormous potential” for exchanges and clearing house operators, the 54-year-old CEO said.

Kloet described the move as a “fundamental sea change.” said.

The parent of the Toronto Stock Exchange, taken over by Canadian banks and pension funds in September, is integrating businesses gained from the C$3.73 billion ($3.74 billion) deal. The merger brought Canada’s main equity exchanges and clearing services under one roof, adding stock exchange competitor Alpha Group and the Canadian Depository for Securities Ltd. clearing house.

TMX aims to attract more customers and accelerate fixed-income electronic trading with the new products.

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FBI Said to Be Looking Into HP’s Claims Over Autonomy Accounting

The FBI, responding to an inquiry by the U.S. Securities and Exchange Commission, is looking into Hewlett-Packard Co. (HPQ)’s allegations of accounting improprieties at its Autonomy Corp. unit, a person familiar with the matter said.

Hewlett-Packard brought its claims about the U.K software company it bought last year to the SEC, which asked the Federal Bureau of Investigation for assistance, said the person, who asked not to be identified because the matter wasn’t public. Whenever a company reports a matter that could be criminal in nature, it will be examined and it wasn’t known whether any action will result from it, the person said.

Hewlett-Packard Nov. 20 accused Autonomy’s former managers of a broad range of financial falsehoods resulting in an $8.8 billion writedown.

More than $5 billion of the charge relates to accounting missteps, including improperly categorized hardware, Hewlett-Packard said. The rest is linked to Hewlett-Packard’s share value and projections that the deal won’t meet expectations, said the company, which also forecast fiscal first-quarter profit that missed analysts’ estimates.

Michael Thacker, a spokesman for Palo Alto, California-based Hewlett-Packard, didn’t immediately respond to phone and e-mail messages seeking comment on the FBI’s actions.

EU Calls on Nations to Apply Financial Supervision Rules

The European Commission urged six countries to implement financial supervision rules granting power to three new regulatory agencies including the European Banking Authority.

France, Greece, Belgium, Luxembourg, Poland and Portugal were given two months to implement new rules due to be in force at the end of last year.

SAC Insider Probe Rides a Finra Referral Into Cohen’s Backyard

The biggest insider case ever, an alleged $276 million fraud that has led prosecutors to the inner-circle of SAC Capital Advisors LP’s Steven Cohen, stemmed in part from a referral from the Financial Industry Regulatory Authority, Wall Street’s self-regulator.

The referral came in 2008 from the New York Stock Exchange Division of Market Regulation, which later became part of Finra, according to three people familiar with the matter. Finra touted the case, against ex-SAC portfolio manager Mathew Martoma, under its website headline, “Actions Resulting from Referrals to Federal and State Authorities.”

The question for the government now is: where do they go from here? Court papers cite a “hedge fund owner” in conversation with Martoma before multimillion-dollar trades were made. But the government must show that a defendant in any insider trading case knew that the trades he was making were based on secret, material information.

Internal SAC e-mails could help the government build more cases in its investigation, several former prosecutors said. A senior trader who isn’t named in court documents said in an e-mail to Martoma as he began selling shares that “no one knows except you me and [the Hedge Fund Owner],” according to the complaint filed in Manhattan federal court. Cohen isn’t named in court papers or charged with a crime.

Martoma, an ex-portfolio manager for SAC’s CR Intrinsic Investors, was arrested Nov. 20 in what the U.S. said was the most lucrative insider scheme ever -- one that took place in the arena of health-care stocks.

Referrals from Finra are often pursued by investigators from the Securities and Exchange Commission and prosecutors from the Justice Department.

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Indonesia to Develop Corporate Bond Electronic-Trading Platform

Indonesia’s Financial Services Authority plans to develop an electronic-trading platform and clearing system for corporate bonds by the end of 2014, Nurhaida, executive commissioner at the authority, told reporters in Jakarta.

The authority will also develop the derivatives market next year to help corporate bond investors hedge, according to Nurhaida.

Courts

Ex-SAC Manager Treated as Pupil by Physician Accused of Tipping

Sid Gilman, a University of Michigan neurologist, was portrayed by U.S. authorities as a $1,000-an-hour consultant who leaked confidential drug trial data that helped hedge fund SAC Capital Advisors LP illegally avoid losses or make profit of $276 million.

Gilman, 80, was chairman of a safety-monitoring committee that oversaw a clinical trial by Wyeth LLC and Elan Corp. into whether the drug bapineuzumab, or bapi, was safe for patients with mild-to-moderate Alzheimer’s disease. Gilman also moonlighted for a New York-based expert network, providing advice at a fee to former SAC portfolio manager Mathew Martoma, according to the Securities and Exchange Commission and Justice Department.

Gilman treated Martoma, 38, as a “friend and pupil” as he leaked him secret data for 18 months, authorities said. Gilman told Martoma on July 17, 2008, that bapi wasn’t helping patients as expected, according to the SEC. Prosecutors Nov. 20 charged Martoma with insider trading and the SEC sued him, saying Gilman’s tips let Stamford, Connecticut-based SAC and its CR Intrinsic Investors unit sell more than $960 million in Elan and Wyeth securities before a July 29, 2008, announcement of the drug-trial results. The SEC also sued Gilman.

Gilman wasn’t charged with a crime or mentioned by name in the Federal Bureau of Investigation complaint against Martoma unsealed Nov. 20 in federal court in New York. Gilman was named in a non-prosecution agreement made public Nov. 20 by prosecutors. He didn’t return calls to his home and office in Ann Arbor, Michigan.

U.S. Attorney Preet Bharara said Nov. 20 at a news conference in Manhattan that Gilman is prepared to testify in connection with a non-prosecution agreement. He declined to say why Gilman wasn’t charged.

“He is cooperating with the SEC and the U.S. Attorney’s Office,” his lawyer, Marc Mukasey, said.

Martoma’s lawyer, Charles Stillman, has said he is confident his client will be exonerated.

Kara Gavin, a spokeswoman for the University of Michigan Health System, didn’t immediately return a call seeking comment on Gilman. Sheryll Marshall, an administrative assistant in the university’s neurology department, said Gilman is well-respected and often participated in medical research.

The criminal case is U.S. v. Martoma, 12-mag-2985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-8466, U.S. District Court, Southern District of New York (Manhattan).

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UBS Said to Face $72 Million Fine for Missing Adoboli’s Trading

UBS AG (UBSN), Switzerland’s largest bank, faces a fine of about 45 million pounds ($71.7 million) for failing to detect billions in unauthorized trades by Kweku Adoboli, according to a person familiar with the situation.

The bank could get a maximum penalty of as much as 50 million pounds from the U.K.’s Financial Services Authority, said the person, who asked not to be identified because the fine isn’t yet public. The final sanction is more likely to be closer to 45 million pounds and hasn’t yet been negotiated, said the person. A fine of that amount would be the U.K.’s second-highest ever.

Adoboli, a former trader in UBS’s London office, was sentenced to seven years in jail on Nov. 20 for fraud in relation to the $2.3 billion loss, the largest from unauthorized trading in British history. A UBS investment-bank executive testified during Adoboli’s trial that losses from his trades could have reached $12 billion. While UBS warned investment-bank employees to report signs of illicit trading after Kerviel’s loss, Adoboli said he could only reach the bank’s goals by ignoring such warnings.

Swiss regulator Finma is doing a joint report with the FSA. The agency’s investigation “is still ongoing and we will comment once it is concluded,” said Tobias Lux, a spokesman for the Swiss regulator.

Richard Morton, a spokesman for UBS in London, and Joseph Eyre, an FSA spokesman, both declined to comment.

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Interviews/Testimony

BOE’s King Says Ring-Fencing of Banks Must Be Clarified

Bank of England Governor Mervyn King, Deputy Governor Paul Tucker and Executive Director of Financial Stability Andrew Haldane spoke about proposals to ring-fence banks’ operations and the separation of retail units.

They testified at the U.K. Parliamentary Commission on Banking Standards in London.

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Bundesbank’s Dombret Urges U.S. Not to Delay Basel Banking Rules

Bundesbank board member Andreas Dombret said U.S. policy makers shouldn’t delay the implementation of global banking rules, known as Basel III.

“There is no alternative to implementing Basel III on a global scale,” Dombret said Nov. 21 in a speech in Frankfurt. “In particular, I call on my colleagues in the U.S. not to unexpectedly question the whole framework in the 11th hour -- after taking part in its negotiation during the entire process.”

Boosting reserves as required by Basel III would help prevent a repeat of taxpayer-funded rescues, while “separating banking functions will not prevent future banking crises,” Dombret said.

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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