Swaps Phase-Out Delay, Gilt Moves, MF Rogue: Compliance

Deutsche Bank AG (DB), the European continent’s biggest bank, is among lenders given an extra two years by the Federal Reserve to separate derivatives trading from U.S. units that get government backing.

The Fed, in letters posted to its website this week, said Frankfurt-based Deutsche Bank, Standard Chartered Plc (STAN), Societe Generale SA (GLE), Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto-Dominion Bank (TD), Credit Agricole SA (ACA), Natixis SA (KN) and Bank of Nova Scotia must determine whether to halt swaps activity or move it to properly capitalized affiliates. Under the Dodd-Frank Act swaps push-out rule, interest-rate and some credit swaps can still be traded inside the banks.

“The potential impact of granting a 24-month transition period is less adverse than the potential impact of denying the transition period,” Robert Frierson, secretary of the Fed board of governors, wrote in the letters, delaying a deadline that otherwise required the push-out from yesterday. Forcing the banks to cut off trades sooner could risk “operational problems and market disruption,” he wrote.

Dodd-Frank, enacted in 2010, expanded swaps oversight as U.S. lawmakers sought to make markets less vulnerable after the 2008 credit crisis. The push-out rule, included in the law by former Senator Blanche Lincoln, requires that equity, some commodity and non-cleared credit derivatives be walled off from bank units with access to deposit insurance and the Fed’s discount window.

The Fed’s letters are almost identical to those the central bank sent to U.S. companies such as Goldman Sachs Group Inc. (GS) and Bank of New York Mellon Corp.

The Office of the Comptroller of the Currency granted the two-year phase-out period last month to national banks it oversees, including JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Morgan Stanley. (MS)

Compliance Action

U.K. Regulator Studying Gilt Moves During QE Buying, Fisher Says

Britain’s Financial Conduct Authority is studying price moves in the gilts market as the central bank carried out purchases under its quantitative-easing program, Bank of England Markets Director Paul Fisher said.

The Bank of England passed information to the U.K. financial regulator, Fisher told lawmakers on the Treasury Committee in London yesterday. It related to central bank bond buying being carried out in a reverse auction on Oct. 10, 2011.

The Bank of England has bought 375 billion pounds ($567 billion) of gilts under its quantitative-easing plan designed to spur growth by capping bond yields. The FCA is already investigating manipulation of benchmarks for interest rates and foreign-exchange rates.

“We can’t comment on specific or potential investigations,” the FCA said in a statement. “We are aware of the comments that’ve been made.”

The Bank of England rejected all bids on Oct. 10, 2011, for notes due August 2017, citing “significant changes in its yields in the run up to the auction.”

Singapore’s MAS Says Local Banks Not at Risk Amid Moody’s Cut

The Monetary Authority of Singapore said in an e-mailed statement that banks have conducted stress tests on their own and had tests coordinated by the central bank, and have “adequate buffers” to cope with higher interest rates.

The MAS has been monitoring risks, including those for the property market, it said in the statement. The authority has been concerned about over-borrowing, it said.

The MAS has taken steps on property risks, including stamp duties and loan ratios, according to the statement.

Moody’s downgraded its outlook for Singapore’s banking system to negative from stable yesterday.

Courts

Morgan Stanley Deserves Repayment From Skowron, Court Rules

Morgan Stanley is entitled to $10.2 million in restitution from Joseph “Chip” Skowron, a former hedge fund manager serving a five-year prison term for insider trading, a U.S. appeals court ruled.

Skowron, 44, asked the U.S. Court of Appeals in Manhattan to overturn a restitution order imposed by a judge after he pleaded guilty to conspiring to commit securities fraud and obstruct justice. U.S. District Judge Denise Cote said Skowron owed the New York-based bank 20 percent of his salary from 2007 to 2010, or $6.4 million, and $3.8 million in legal fees.

The appellate court yesterday upheld Cote’s ruling that the compensation is bank property because Skowron “manifestly failed to provide the honest services for which Morgan Stanley compensated him.” Skowron was a manager at Morgan Stanley’s FrontPoint Partners LLC until he was charged in April 2011 with using inside information to avoid $30 million in losses.

The bank also deserves payment of its legal fees stemming from a Securities and Exchange Commission investigation, according to the panel.

Skowron in August 2011 admitted helping FrontPoint avoid more than $30 million in trading losses on Human Genome Sciences Inc., a pharmaceutical firm acquired by GlaxoSmithKline Plc. (GSK)

Skowron’s attorney Joshua H. Epstein didn’t immediately return a call seeking comment on the ruling.

“We are very, very pleased with the outcome,” Morgan Stanley’s attorney Kevin Marino said in a phone interview.

The district court case is U.S. v. Skowron, 11-cr-00699, U.S. District Court, Southern District of New York (Manhattan). The appeal is U.S. v. Skowron, 12-1284, U.S. Court of Appeals for the Second Circuit (Manhattan). Morgan Stanley’s suit is Morgan Stanley v. Skowron, 12-cv-8016, U.S. District Court, Southern District of New York (Manhattan).

AIG Can Probe Rogue Trader’s Employment Status at MF Global

An American International Group Inc. (AIG) unit and other insurers can probe whether a “rogue trader” was an employee of MF Global Holdings Inc. as part of a lawsuit over liabilities for losses tied to the company’s collapse, a New York appeals court ruled.

A five-judge appellate panel in Manhattan yesterday ruled that while MF Global suffered a “direct financial loss” as a result of the trader’s actions, it wasn’t clear that he was an employee as he was paid by commission. The judges modified a lower-court ruling to allow AIG to seek evidence on his status.

The trader, Evan Brent Dooley, was sentenced to five years in prison in April for making unlawful unauthorized trades that caused the now-defunct futures firm to lose more than $141 million in 2008.

MF Global submitted a claim for the loss to insurers including New York-based AIG’s New Hampshire Insurance unit, which denied coverage based on the fact that MF Global didn’t suffer a “direct financial loss” and that Dooley wasn’t an employee, according to court filings. The insurer, together with others, sued MF Global to obtain a declaration that they were not responsible for the loss.

An MF Global spokeswoman, Beth Sussman, didn’t comment immediately on the decision. Jon Diat, a spokesman for AIG, didn’t immediately respond to a message seeking comment.

The case is New Hampshire Insurance Co. v. MF Global Inc., 601621/2009, New York State Supreme Court, New York County (Manhattan).

Ex-Commerzbank Official Gets Probation in IRS Conflict Case

A former U.S. Internal Revenue Service employee was sentenced to three years’ probation for passing information about a tax-fraud audit to Commerzbank AG while he was working to get a job with the Frankfurt-based bank.

Dennis Lerner, 60, pleaded guilty in March to a count of criminal conflict of interest and illegally disclosing federal income-tax information. Prosecutors said that while he was managing an IRS audit of Commerzbank and involved in negotiating a $210 million settlement of tax-fraud charges, he sought a job with the company.

Prosecutors said that the U.S. was investigating Commerzbank in connection with about $1 billion in allegedly unreported income and that shortly after an accord was reached, Lerner left his position and “immediately after resigning” began working at Commerzbank as its tax director.

In court yesterday in Manhattan, Lerner apologized to his family as well as the government, saying he used “very poor judgment.”

Assistant U.S. Attorney Randall Jackson said that prison was warranted and that U.S. sentencing guidelines recommend a term of four to 10 months in prison. U.S. District Judge John Keenan took Lerner’s poor health, including a heart condition, into account in fashioning the sentence.

Margarita Thiel, a Commerzbank spokeswoman, declined to comment on Lerner’s sentencing.

The case is U.S. v. Lerner, 12-cr-00952, U.S. District Court, Southern District of New York (Manhattan).

Interviews

Levitt Discusses Dodd-Frank Act, Wall Street Corruption

Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, discussed the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its effectiveness in reducing corruption on Wall Street. Levitt talked with Bloomberg’s Tom Keene and Sara Eisen on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

SEC Enforcement Unit’s Lench Is Leaving Agency After 23 Years

Kenneth R. Lench, chief of the Securities and Exchange Commission Enforcement Division’s Structured and New Products Unit, is leaving the agency for private industry after more than 23 years of service.

Lench will leave the SEC at the end of this month, the agency said in an e-mailed statement.

FDIC Director of Office of Minority, Women Inclusion to Retire

D. Michael Collins, director of the Federal Deposit Insurance Corp.’s Office of Minority and Women Inclusion since 1999, will retire effective Aug. 3, according to a statement issued by the office.

Melodee Brooks, currently senior deputy director, was named acting director.

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net.

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