Rethinking Copper ETF, Deere Probe Ends, Bats: Compliance

Industrial copper users including AmRod Corp., Southwire Co. and Encore Wire Corp. (WIRE) urged U.S. regulators to reverse a decision clearing the way for a JPMorgan Chase & Co. (JPM) exchange-traded fund backed by the metal.

The user group has said that the JPM XF Physical Copper Trust, the first U.S. exchange-traded fund backed by physical copper, would leave less for manufacturers, creating shortages and boosting prices. The proposed rule change by NYSE Arca Inc. to list the funds shares was approved in an order last month by the Securities and Exchange Commission.

“We believe the commission’s findings that the listing and trading of shares in the JPM Physical Copper Trust will not have a material impact on the supply of physical copper available for immediate delivery is not based on substantial evidence and is therefore arbitrary and capricious,” Eaton & Van Winkle LLP, a firm representing the copper users, said in a letter to the SEC dated Jan. 9.

Compliance Policy

Euribor Maturities Must Be Halved for Simplicity, EU Says

As part of an effort to restore trust in the scandal-hit Euribor interest rate, regulators said the number of maturities that make up the benchmark for trillions of euros of lending should be cut from 15 to seven.

Europe’s top banking and markets regulators told the European Banking Federation, which oversees Euribor, to strengthen governance procedures to ensure no banks try to manipulate the rate. Cutting the number of tenors would “have the benefit of simplifying” submissions.

Global watchdogs are imposing fines and criminal penalties against lenders accused of fiddling interest-rate benchmarks such as Euribor and Libor, the London interbank offered rate. Raiffeisen Bank International AG and Rabobank Groep said this year they would leave the 40-strong Euribor panel. Citigroup Inc. (TRVC) and DekaBank Deutsche Girozentrale left the group of euro rate-setters last year.

The benchmarks are intended to represent the rate at which banks can borrow from other lenders in a specific currency over various periods. Authorities are investigating whether more than a dozen banks altered their benchmark-rate submissions to profit from derivative trades or to appear more financially stable.

The three-week maturity should be cut from Euribor, along with the two, four, five, seven, 10 and 11-month tenors as a minimum, the regulators said. The EBF should perform regular governance audits and publicly disclose the results, ESMA and the European Banking Authority said. The proposed changes weren’t agreed upon by the regulators until last night.

The EBA set out guidelines for national supervisors, recommending they require their banks to have internal codes of conduct in place for Euribor submissions. The recommendations changes mirror a streamlining of Libor last year.

Lender Scrutiny of Borrowers Tightened Under U.S. Mortgage Rules

The U.S. Consumer Financial Protection Bureau issued a rule yesterday that for the first time forces lenders to verify borrowers’ ability to repay mortgages by confirming income and assets.

The rule, mandated by Congress in response to lax underwriting standards before the 2008 financial crisis, will also offer some legal protection for lenders who follow guidelines for so-called qualified mortgages, according to an e-mailed statement by the bureau. The measure also insulates issuers of qualified mortgages at prime interest rates from future lawsuits.

The rule takes effect Jan. 10, 2014 according to the statement.

The qualified mortgage rule will apply to home loans in the underwriting phase. The rule on repayment ability is the first in a series of rules that the CFPB will issue that will shape the post-crisis mortgage market. The bureau will unveil rules on mortgage servicing at a Jan. 17 hearing in Atlanta. Those rules will apply equally to banks and non-bank servicers such as Ocwen Financial Corp. (OCN)

Other rules to be issued by the bureau will cover appraisals and loan officer compensation. The agency has also proposed simplifying the documents borrowers receive when applying for and concluding a mortgage.

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Basel III Punishing Dutch Debt Over a Risk That Isn’t: Mortgages

Investors in 262 billion euros ($349 billion) of Dutch residential mortgage-backed securities risk being penalized by new bank liquidity rules, even as the securities prove among the safest home-loan bonds globally.

The notes won’t be categorized as liquid assets under regulations approved last week by the Basel Committee on Banking Supervision because the underlying mortgages have an average loan-to-value ratio of 95 percent, a quirk of the Dutch housing finance system, where borrowers take on more debt because they can use tax deductions in place since the 19th century. The rules allow banks to apply securities only where the ratio is less than 80 percent, according to committee documents.

Excluding Dutch bonds, in which defaults are close to zero, shows the flaws in trying to apply global standards for banks after more than 27 nations spent four years crafting regulations to prevent a repeat of the 2008 global financial crisis.

U.S. government-backed mortgage securities receive more preferential treatment with debt-guaranteed by U.S.-owned Ginnie Mae counting the same as Treasuries, which carry no discounts. Fannie Mae and Freddie Mac securities also can be fully counted up to a cap.

For more, click here.

Compliance Action

Deere Says SEC Doesn’t Plan Any Enforcement Action After Probe

Deere & Co. (DE), the world’s largest maker of agricultural equipment, said the U.S. Securities and Exchange Commission completed an investigation of the company and doesn’t plan to pursue any enforcement action.

Deere fully cooperated with the SEC, the Moline, Illinois-based company said yesterday in a statement.

The company said in August 2011 it was being investigated by the SEC about a possible violation of the Foreign Corrupt Practices Act and that the agency requested documents related to Russia.

Bats Says System Errors Caused Pricing Problems Over 4 Years

Bats Global Markets Inc., the third-largest U.S. stock exchange operator, said its computers allowed trades that violated rules intended to ensure all investors get the best prices for equities over a period of four years.

Machines that match orders for two Bats equity exchanges and an options venue allowed some trades to occur at prices inferior to the best available bid or offer and enabled others to violate rules for short sales, or bearish bets, the company said in a notice published on its website Jan. 9. Customers lost $420,360, because of rule violations, Randy Williams, a Bats spokesman, said by e-mail.

SEC spokesman John Nester declined to comment in an e-mail.

Bats said it identified the trading issues in an internal review and that none of its customers had reported it. The first indication of the problem was on Jan. 4 and it was confirmed on Jan. 7, according to a statement from the company.

The software problem at Bats is a symptom of overly complex market regulations that should be simplified, Chief Executive Officer Joseph Ratterman said in a phone interview. About 250 customers, mainly market-making firms, and 0.004 percent of trades on Bats’s two equity exchanges were affected by the problem that dates back to 2008, Ratterman said. About 0.0009 percent of options trades were affected, he said.

According to its rules, Bats’s aggregate liability to its customers is limited to $500,000 per calendar month when the exchange makes a mistake in the normal course of business.

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Libor Probe Marks Financial Fraud Priority for FBI in Washington

The U.S. investigators at the center of the international probe into the manipulation of interest rates may not be who people would expect -- and they are far from done with their work.

The FBI’s Washington field office, known for its terrorism and public corruption work, is conducting the U.S. probe into the rigging of benchmarks including the London Interbank Offered Rate. Their work has led in part to two international resolutions secured in the investigation, including the $1.5 billion settlement with UBS AG (UBSN) in December and charges against two of the bank’s former traders.

The settlement, which also included a guilty plea from the company’s Tokyo subsidiary, and the investigations into banks and traders across the globe underscore the priority attacking “major fraud” has become for the office, Timothy Gallagher, the head of the Washington criminal division who is overseeing the probe, said in an interview.

The Federal Bureau of Investigation’s role at the center of financial fraud cases isn’t new -- the New York office has spearheaded some of the largest corporate and securities fraud cases in history. The Washington office’s emergence, bolstered by its relationship with the Justice Department lawyers leading the probe and its two financial fraud squads, has pushed it to the forefront of Wall Street’s radar.

Along with the Justice Department and Commodity Futures Trading Commission, regulators from at least five countries are investigating the banks involved.

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Citigroup Joins Goldman in Starting Electronic Bond-Trade System

Citigroup Inc. (C), the third-biggest U.S. bank by assets, started an electronic bond-trading service as Wall Street firms seek to help clients buy and sell debts among themselves.

Clients of the Citi Credit Cross trading system have been able to enter transactions themselves since this week, said Scott Helfman, a spokesman for New York-based Citigroup. The service will be phased in during the next few weeks, he said.

Citigroup, Goldman Sachs Group Inc. and Morgan Stanley are among Wall Street firms that traditionally acted as middlemen by warehousing bonds until customers sought to buy them. That model is changing as U.S. and international rules meant to make the banking system safer have prompted dealers to cut the amount of debt they hold. The firms now seek to match bond investors with each other to ease trading.

Other firms such as MarketAxess Holdings Inc., the owner of an electronic bond and derivatives-trading system, also seek to allow debt investors to trade with each other.

Moving to electronic bond-trading systems may reduce costs by as much as five times, according to researchers.

Dow Jones newswires reported on Citigroup’s plans yesterday.

Courts

Ex-SAC Analyst Wang Spared Prison in Insider Trading Case

Wesley Wang, a former analyst for SAC Capital Advisors LP’s Sigma Capital unit, was sentenced to two years’ probation for insider trading after cooperating with a government investigation.

Wang recorded phone calls and wore a body wire, incriminating about 20 people in insider trading, some of whom haven’t yet been charged, prosecutors said. U.S. District Judge Jed Rakoff, citing Wang’s cooperation, Jan. 9 sentenced him to probation, instead of as many as 37 months in prison called for in federal sentencing guidelines.

Wang, 39, in a court appearance before Rakoff, apologized “for breaking the insider trading laws.”

He pleaded guilty last year to passing illegal tips to former Sigma Capital portfolio manager Dipak Patel and to Whitman Capital LLC hedge fund founder Doug Whitman. Wang’s testimony at Whitman’s criminal trial helped lead to his conviction on charges of conspiracy and securities fraud, prosecutors said.

Patel, who ran a five-person team investing in technology stocks before leaving SAC in 2011, hasn’t been charged with a crime.

Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, has said that Cohen and SAC did nothing wrong.

The case is U.S. v. Wang, 12-cr-541, U.S. District Court, Southern District of New York (Manhattan).

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SEC Sues Volt Information for Allegedly Misstating Revenue

Volt Information Sciences Inc. (VISI) was sued by the U.S. Securities and Exchange Commission and settled with the regulator over claims it misstated $7.55 million in software revenue and income.

Volt, a provider of staffing, call-center and technology services, said that it had a $10 million contract with a customer to justify the revenue recognition and incorporated the improper revenue in regulatory filings with the SEC, according to a complaint filed yesterday in federal court in Manhattan.

“The company is pleased to resolve the matter and move forward,” Joan McKown, a partner at Jones Day who is representing New York-based Volt, said in a phone interview. “They cooperated with the SEC, and they have taken extensive remedial steps. The SEC is not seeking a penalty against the company.”

The SEC also settled its claims against its former chief financial officer.

Volt announced the SEC investigation in November 2008.

“We are committed to adhering to the highest standards of accounting and corporate governance,” Chief Executive Officer Ron Kochman said in a statement, adding that the company has cooperated with the SEC “throughout this investigation.”

The accord is subject to approval by a federal judge in New York who is presiding over the case.

The cases are Securities and Exchange Commission v. Volt Information Sciences Inc., 13-cv-00237, and Securities and Exchange Commission v. Egan, 13-cv-00236, U.S. District Court, Southern District of New York (Manhattan).

Interviews/Hearings

Barclays Must Change Culture, Ex-FSA Chief Hector Sants Says

Hector Sants, the former chief of the U.K.’s Financial Services Authority, said that he wants to change Barclays Plc (BARC)’s culture and behavior when he joins the bank as a compliance director later this year.

“I’m going to do what I do best, and that’s drive operational change,” Sants told lawmakers in London.

Keep, Chapman Comment on Herbalife and Ackman’s Pyramid Theory

Bill Keep, dean of the business school at the College of New Jersey, talked about hedge fund manager Bill Ackman’s theory that Herbalife Ltd. (HLF)’s business model is a pyramid scheme and the SEC’s investigation into the company. He explained the difference between a multi-level marketing company and a pyramid scheme.

Ackman, head of New York hedge fund Pershing Square Capital Management LP, had said at the Sohn Investment Conference in New York Dec. 20 that a year of research convinced him Herbalife is a pyramid scheme. The company, whose shares he began selling short seven to eight months earlier, misrepresents sales figures, misleads distributors about potential earnings and sells a commodity product at inflated prices, he said at that time.

Keep spoke with Scarlet Fu, Julie Hyman and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the Keep video, click here.

Separately, Robert Chapman, founder of Chapman Capital LLC, talked about his investment in Herbalife and Ackman’s claims. Chapman said it is “simply not the case here,” that Herbalife’s business meets the definition of a pyramid scheme.

Chapman spoke with Deirdre Bolton on Bloomberg Television’s “Money Moves.”

For the Chapman video, click here.

For more, click here.

Cammarn Explains ‘Lincoln Amendment’ Impact For Foreign Banks

Scott Cammarn, a partner at Cadwalader, Wickersham and Taft, discussed a little known provision of Dodd-Frank that could become expensive for foreign banks doing business in the U.S. While openly acknowledged by lawmakers as a mistake, the so-called Lincoln Amendment is perceived to treat U.S. branches of foreign banks differently from domestic banks dealing in swaps.

Cammarn talked with Bloomberg Law’s Lee Pacchia on Bloomberg Television’s “Behind the Headlines.”

For the video, click here.

Former UBS Investment Bank Head Says He Was Negligent on Libor

Jerker Johansson, a former head of UBS AG’s investment bank, said his unawareness of rigging of global interest rates at the biggest Swiss bank was a failure and negligent.

Johansson, who headed the unit from March 2008 until April 2009, made the remarks to the U.K.’s parliamentary commission on banking standards in London yesterday.

Huw Jenkins, who headed the unit before Johansson, and former chief executive officer Marcel Rohner told the hearing that they were “shocked” to hear about the misconduct, for which UBS was fined $1.5 billion by regulators in the U.S., the U.K. and Switzerland in December. Johansson, Jenkins, Rohner and Alexander Wilmot-Sitwell, who co-headed the investment bank for 1 1/2 years until November 2010, all said they learned of the rigging only recently from press reports.

For more, click here.

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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