Pakistan Rules, CME Suit Dropped, ECB Power: Compliance

Pakistan’s central bank said new Islamic banking rules will help meet a goal of almost doubling the industry’s market share to 15 percent in five years.

The State Bank of Pakistan issued profit-sharing guidelines on Nov. 19, exempting Shariah-compliant lenders from paying the minimum rate of return on deposits that is required of non- Islamic banks. This will help sustain growth of around 35 percent a year, Saleem Ullah, Islamic banking director at the authority, said Nov. 27. Karachi-based Standard Chartered Bank Pakistan, BankIslami Pakistan Ltd. and Bank Alfalah Ltd. (BAFL), said the rule would level the playing field and boost profits.

Islamic finance is a niche industry and support from the central bank will help it expand even if overall economic growth slows, Sayem Ali, an economist at Standard Chartered in Karachi, said in a Nov. 27 interview.

The regulation requires Shariah-compliant banks to set up pools of deposits with specific assets, income and expenses. Customers will earn a pre-agreed share of any profit or loss earned on the financing and investments made with each pool, the State Bank said in a statement last week. Previously, all banks were required to pay a prescribed minimum rate on their deposits, which was raised to 6 percent from 5 percent in April.

Lenders may not claim more than 50 percent of the profit or loss ratio, according to the central bank statement. The rule will also require Islamic banks to disclose their ratios, as well as the risk and reward profile and makeup of each pool.

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Compliance Policy

Dodd-Frank Swap-Clearing Rule Gets Final Approval From CFTC

Wall Street’s largest swap dealers, including Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM), will be required to guarantee trades at clearinghouses starting in March under a rule made final by the top U.S. derivatives regulator.

The five-member Commodity Futures Trading Commission voted unanimously in a private process Nov. 28 to complete the final determinations, the agency said in a statement. The rule, which had been scheduled for a public vote, determines which credit and interest-rate swaps must be guaranteed at clearinghouses owned by LCH.Clearnet Group Ltd., CME Group Inc. (CME) and Intercontinental Exchange Inc. The commissioners can vote on paper outside of their public meetings in a process known as seriatim.

CFTC Chairman Gary Gensler said in statement that central clearing lowers risk and democratizes the market by eliminating the need for market participants to individually determine counterparty credit risk.

The CFTC and Securities and Exchange Commission are required by the 2010 Dodd-Frank Act to write rules to curb risk in a $639 trillion global market. Lawmakers took action after unregulated trades helped fuel a credit crisis that in 2008 led to the collapse of Lehman Brothers Holdings Inc. and U.S. bailouts for companies including American International Group Inc. (AIG), the New York-based insurer.

Clearinghouses accept collateral from buyers and sellers to reduce the risk from default in a trade. The commission’s rule requires swaps in four interest-rate swap classes and two credit-default classes to be submitted to clearinghouses. Goldman, JPMorgan, Bank of America Corp. and other banks that dominate the swaps market will face the clearing requirement by March 11.

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House Republicans Seek Delay of Volcker Rule Implementation

Two top Republican Congressmen have asked regulators to further delay the so-called Volcker rule that would ban U.S. banks from proprietary trading.

Representatives Spencer Bachus of Alabama and Jeb Hensarling of Texas sent a letter to regulators yesterday requesting a delay of the rule’s effective date for two years after the final version is issued. They cited concerns about disagreements among regulators and a lack of transparency in the rule writing. Bachus is the House Financial Services Committee chairman; Hensarling will succeed him in the next Congress.

Regulators expect to finish writing the rule in the first quarter of 2013, according to a person familiar with the process who requested anonymity because the matter isn’t public.

Mary Miller, the U.S. Treasury’s undersecretary for domestic finance, said in a speech on Nov. 16 that “the process is not as easy or simple as any of us would like.”

The process may be further delayed by the departure of the Mary Schapiro as chairman of the Securities and Exchange Commission next month. Until President Barack Obama can confirm a fifth member of the commission, the remaining members face a partisan split that will make controversial rulemaking difficult.

The Volcker rule, mandated by the Dodd-Frank Act of 2010, was the subject of complaints from banking industry groups that it was confusing and potentially harmful. The Fed has the authority to further extend the period of compliance beyond July 2014.

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Compliance Action

Bats Retail Stock Program Starts Dec. 17 to Compete With NYSE

Bats Global Markets Inc. plans to start a one-year program Dec. 17 to compete with the New York Stock Exchange by giving retail investors better prices.

The service will allow orders from individuals to get prices at least a tenth of a cent better than those available to mutual and hedge funds, brokers, and other firms, according to Chris Isaacson, chief operating officer at the third-largest U.S. stock market operator. Bats BYX Exchange, one of its two equity markets, is seeking more orders from individuals and will compete with firms like Knight Capital Group Inc. and Citadel LLC that provide transactions to clients of retail brokers.

NYSE’s retail-liquidity program, which began in August, was the first by a stock exchange to segment orders and offer different prices based on the type of user. Chief executives of NYSE Euronext, Nasdaq OMX Group Inc. and Bats have said in congressional testimony, at conferences and on calls with analysts that their markets are hurt by restrictions about how they execute orders that don’t apply to brokers and off-exchange venues that trade within their own walls.

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EU Parliament Endorses Handing ECB Bank Supervisory Powers

European Union lawmakers gave broad approval to plans for the European Central Bank to take on bank oversight duties in a bid to tame the bloc’s fiscal crisis.

In a vote in Brussels yesterday, the European Parliament’s Economic and Monetary Affairs Committee backed the plan, calling for the ECB to be given far-reaching powers over bank capital and the granting of bank licenses, while saying it should cooperate closely with national regulators.

EU leaders agreed in June and October to move forward with common ECB-led bank supervision to separate financial-sector risks from sovereign debt troubles, with the goal of agreeing on a political framework by Jan. 1. If a common supervisor is set up next year, it would open the door for the euro area’s firewall fund to offer direct aid to banks. The EU is racing to meet an end-2012 deadline for agreeing on how the ECB supervision should work.

Sharon Bowles, the committee’s chairwoman, said that finance ministers must reach a deal on the supervisory law at their meeting on Dec. 4 if a final agreement on the legislation is to be achieved by year-end.

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Standard Chartered Near Accord on Iranian Clients, WSJ Says

Standard Chartered Plc (STAN) is nearing a settlement with the U.S. to pay around $300 million in fines over transactions with Iranian clients that may have violated sanctions against the country, the Wall Street Journal reported.

The move would end investigations brought by the U.S. Justice Department, the U.S. Treasury Department, the Federal Reserve and the Manhattan District Attorney’s office, the newspaper said, citing unnamed people involved in the negotiations. Talks to resolve the matter are continuing and all sides aim to conclude discussions in coming days, it said.

An accord with the U.S. would follow a consent order signed by the London-based bank in September that completed a record $340 million settlement with New York’s Department of Financial Services involving wire transfers on behalf of Iranian clients. The bank also agreed to install a monitor for two years, according to the New York regulator.

Joan Vollero, a spokeswoman for the Manhattan District Attorney, and Bill Miller, a spokesman for the U.S. Attorney’s office in Washington, declined to comment on the report. Julie Gibson, a spokeswoman at Standard Chartered, declined to comment, as did Barbara Hagenbaugh, a spokeswoman at the Federal Reserve.

The New York settlement amount was the largest ever paid to an individual regulator as part of a money-laundering accord.

ECB Wins Ruling to Deny Access to Secret Greek Swap Files

The European Central Bank will be allowed to keep private files showing how Greece used derivatives to hide its debt after defeating the first court challenge using the bloc’s freedom of information rules.

“Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece,” the EU General Court in Luxembourg said yesterday, rejecting a request by Bloomberg News initially filed in August 2010.

Yesterday’s ruling by three judges denies European taxpayers, on the hook for the cost of Greece’s 240 billion-euro ($311 billion) bailout, the opportunity to see whether EU officials knew of irregularities in Greece’s public accounts before they became public in 2009. The decision underscores the ECB’s lack of accountability as it expands its powers to become the euro area’s chief banking regulator, said Georg Erber, a research associate at the German Institute for Economic Research.

Bloomberg’s freedom-of-information request was twice rejected by the ECB before the news organization sued in December 2010. Bloomberg sought access to two internal papers drafted for the central bank’s six-member Executive Board.

The ECB said at a June hearing that publishing the files could still aggravate the sovereign-debt crisis, putting the future of the single currency at risk.

The ruling bodes badly for transparency in Europe, said Gunnar Beck, a barrister and a reader in EU law at the University of London.

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Michigan Professor Linked to SAC Insider Trading Case Resigns

Sid Gilman, the University of Michigan neurologist linked to an insider-trading case, has resigned his university position.

Gilman, 80 was named by authorities as the person who leaked data to Mathew Martoma, 38, an SAC Capital Advisors LP hedge fund manager charged with insider trading. Gilman quit his university post on Nov. 27, Pete Barkey, a spokesman for the Ann Arbor-based university’s medical school, said in an e-mail.

Gilman had been paid $1,000 an hour to act as a consultant to Martoma and in 2008 allegedly gave the hedge fund manager details of a clinical trial for an Alzheimer’s drug being developed by Wyeth LLC. The neurologist treated Martoma as a “friend and pupil” while leaking him secret data for 18 months, authorities said.

Martoma has been arrested and charged with insider trading, and is accused of helping the firm make $276 million using the information provided by the university researcher.

Gilman was chairman of a safety-monitoring committee that oversaw a clinical trial by Wyeth, now owned by Pfizer Inc., and Elan Corp. into whether the drug bapineuzumab was safe for patients with mild-to-moderate Alzheimer’s disease. He also moonlighted for a New York-based expert network, providing advice at a fee, according to the Securities and Exchange Commission and the U.S. Justice Department.

The university said in a statement Nov. 21 that it “is carefully reviewing all of Dr. Gilman’s activities while a faculty member.” Barkey said he had no further comment about what other steps the university might take.

Gilman wasn’t charged. The non-prosecution agreement between Gilman and prosecutors, dated Nov. 15, requires him to forfeit $186,781, representing his payments from Elan and an expert-networking post that connected him with Martoma.

Separately the SEC will likely hold off, if the past is any guide, on its threat to sue SAC Capital until prosecutors determine whether they can build a criminal insider-trading case against the hedge fund’s founder, Steven A. Cohen.

U.S. Attorney Preet Bharara in Manhattan took a step closer to the billionaire on Nov. 20, when Martoma was arrested on the charges of using inside information to trade the stocks of Elan and Wyeth. Cohen sold the stocks after speaking with Martoma, according to prosecutors and an SEC complaint, the first time they had linked him to trades at the center of an insider case.

The same day, the SEC notified Stamford, Connecticut-based SAC Capital that it’s considering pursuing civil fraud claims against the $14 billion firm related to Martoma’s trading, three people with knowledge of the matter said two days ago. It was another example of how the SEC and Bharara have cooperated in their probe of insider trading that has led to more than 80 people, with prosecutors often going to court first.

“The U.S. attorney brought a case against Martoma to try to force him to cooperate against Cohen to the extent that there is a case against him,” said Marc Powers, the leader of Baker & Hostetler LLP’s national litigation and regulatory enforcement practice in New York.

In addition to fraud, the SEC’s so-called Wells notice to SAC Capital also outlined claims related to the firm’s responsibility for overseeing CR Intrinsic Investors LLC, the unit that employed Martoma, said one of the people, who like the others asked not to be named because the information is private. The regulator may extend the fraud and oversight claims to Cohen himself, the person said.

John Nester, a spokesman for the SEC in Washington, declined to comment on whether or how the agency would proceed against SAC Capital. Ellen Davis, a spokeswoman for Bharara, declined to comment.

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Courts

CME Group Drops Suit Challenging Swap-Data Repository Rules

CME Group Inc., owner of the world’s largest futures market, dropped a lawsuit challenging the U.S. Commodity Futures Trading Commission’s new rules on trade-data reporting after the agency backed away from the requirements.

CME, in a filing yesterday in federal court in Washington, said it was dismissing the case at least for now that sought to block the agency’s cleared-swaps reporting regulations under the Dodd-Frank Act financial reform legislation. Nov. 28, the agency amended one policy and said it’s seeking public comment on how CME proposes to report swap data.

Laurie Bischel, a CME Group spokeswoman, said in an e-mail that the group hopes the CFTC “will reconsider” the redundant rules over the coming months.

Steve Adamske, a CFTC spokesman, didn’t immediately respond to an e-mail message seeking comment on the dismissal.

CME sued the commission on Nov. 8 seeking a permanent injunction against rules requiring registered derivatives- clearing organizations, such as itself, to provide nonpublic reports of cleared swap transactions to a new swap data repository established under the act.

Nov. 28, the commission withdrew part of a document governing how trade price and volume information is routed to new databases under the Dodd-Frank Act. The agency also sought comment Nov. 28 on CME’s proposed policy of having data for trades guaranteed by its clearinghouse sent to its own so-called swap-data repository.

The case is Chicago Mercantile Exchange Inc. v. U.S. Commodity Futures Trading Commission, 12-cv-01820, U.S. District Court, District of Columbia (Washington).

Porsche Seeks to Overturn Hedge Fund Suit Ruling in New York

Porsche SE (PAH3) urged an appeals court to overturn a ruling that the carmaker must face a lawsuit by hedge funds accusing it of hiding a plan to corner the market in Volkswagen AG (VOW) shares.

Porsche yesterday asked the New York State Supreme Court’s Appellate Division in Manhattan to reverse Justice Charles Ramos’s August decision that had rejected the carmaker’s motion to dismiss the 2011 lawsuit.

The suit was brought 26 hedge funds including David Einhorn’s Greenlight Capital Inc.

The funds, which bet that Volkswagen stock would fall, claim Stuttgart, Germany-based Porsche misled investors by denying through much of 2008 that it intended to acquire Volkswagen and by using manipulative trades to hide its stock positions. The plaintiffs are seeking more than $1 billion in damages.

Robert J. Giuffra Jr., an attorney for Porsche with Sullivan & Cromwell LLP in New York, told the appellate panel yesterday that the lawsuits don’t belong in New York because “Germany has a far greater connection to the issues in this case than does the U.S. and New York.” Some of the plaintiffs have also sued the carmaker in Germany.

None of the plaintiffs are organized under the laws of New York and 10 of the funds are domiciled outside the U.S., Giuffra said in court documents.

Porsche is also being sued in Europe over the issue. A court in Braunschweig, Germany, in September dismissed two cases, seeking less than 5 million euros combined. Four more cases, asking for more than 4 billion euros combined, are still pending at that court.

The New York cases are Viking Global Equities LP v. Porsche Automobil Holdings SE, 650435/2011, and Glenhill Capital LP v. Porsche Automobil Holding SE, 650678-2011, New York State Supreme Court, New York County (Manhattan).

Interviews

King Signals U.K. Banks Need More Capital Against Losses

Bank of England Governor Mervyn King signaled U.K. banks may need to build up the capital they hold against potential losses, and asked regulators to report back by March on how lenders will comply.

He made the remarks at a news conference yesterday in London.

Banks may need to make bigger provisions for future loan losses and the cost of regulatory fines and customer redress, King said. He also noted that risk-weightings may be inappropriate, and referred to a report that said the capital ratios that are used to calculate may be overstated by as much as 35 billion pounds ($56 billion) by the country’s four biggest banks.

King is trying to press banks to raise capital levels without prompting them to shrink lending, threatening economic growth. Regulators are also increasingly concerned that banks may be altering risk-weightings to bolster capital ratios artificially. By changing how they calculate risk-weightings -- the probability of default assigned to loans, mortgages and derivatives -- lenders can boost capital ratios without cutting loans, selling assets or tapping investors.

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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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