The fate of the Dodd-Frank Act’s ban on banks trading for their own accounts -- one of the final pieces of the U.S. effort to prevent a repeat of the 2008 financial crisis -- may rest with a cluster of economists at the Securities and Exchange Commission.
The agency’s 50 economists are attempting to calculate the costs and benefits of the so-called Volcker rule, a linchpin of the financial overhaul that would curb the kind of high-stakes proprietary trading that could lead to crippling losses or bailouts at banks like JPMorgan Chase & Co. or Citigroup Inc. (C)
Court challenges that overturned other Dodd-Frank regulations because of faulty cost-benefit analysis have increased pressure on the SEC economists, led by Craig M. Lewis, a veteran finance professor on leave from Vanderbilt University. Their work may determine whether the rule could withstand a similar lawsuit -- an option banks and trade groups say is under consideration.
The economists are racing the clock: Regulators are under pressure from President Barack Obama and Treasury Secretary Jacob J. Lew to finish the rule in the next three months. At a recent meeting, Lew gave the heads of the five agencies drafting the rule a series of deadlines designed to make sure the government meets the year-end target, according to a person briefed on the meeting who asked not to be identified because it wasn’t public.
The agencies -- the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Commodity Futures Trading Commission and SEC -- have reached agreement on key issues, including the definitions of activities like market-making and portfolio hedging, and are now working on the final text, according to three people familiar with the process who declined to provide details.
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China Watchdog Embraces Risk After Everbright Fat Finger
China’s securities watchdog is forging ahead with rules that allow brokers to invest in complex financial products and enter risky new businesses even after an unprecedented $3.8 billion trading error roiled markets.
In the past six weeks, the China Securities Regulatory Commission ended an 18-year hiatus on trading of treasury bond futures and said it would let more brokerages borrow stock for short selling. Those measures were disclosed after misplaced bets caused by faulty software at Everbright Securities Co. (601788) on Aug. 16 caused the wildest swings in Shanghai shares since 2009.
Policy makers in China, seeking to improve allocation of capital, have since 2008 permitted brokerages including Shanghai-based Everbright to offer clients short selling and margin trading, as well as betting on derivatives with their own funds. While the state-controlled brokerage has now been suspended from most proprietary trading, CSRC Chairman Xiao Gang shows no loss of appetite for risk taking.
Press officials for the CSRC didn’t reply to questions faxed to their Beijing office seeking comment. Everbright didn’t respond to questions sent to its Shanghai office. China’s securities watchdog has pledged to scrutinize risk controls among the nation’s brokerages. The regulator said on Aug. 30 that it was setting up special groups to study ways to improve oversight of the securities industry.
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Switzerland and U.S. Agree to Delay FATCA Implementation
The U.S. Foreign Account Tax Compliance Act is to be implemented from July 1, 2014, instead of Jan. 1, 2014, the Swiss government said in statement yesterday.
The law is designed to curb tax evasion by Americans abroad. The Swiss said the new deadline is in line with that of other countries. Parliament approved the changes Sept. 27.
The FATCA agreement can be challenged in an optional referendum, according to the statement.
Earlier, the U.S. Internal Revenue Service on July 12 gave overseas banks a six-month delay to Jan. 1, 2014, to begin compliance with FACTA, the Treasury Department said at that time.
The July 12 extension of the act followed a previous one-year delay.
Banks Face Basel Debt Rule Capturing Off-Balance Sheet Risks
Banks are set to face a broad international leverage limit that will catch off-balance sheet risks and prevent them from hiding their debt, according to the head of the Basel Committee on Banking Supervision.
The Basel group is seeking to put a ceiling on indebtedness that will prove robust no matter how complicated a bank’s business model, Stefan Ingves, its chairman, said in an interview.
Ingves is also governor of Sweden’s central bank.
A quarter of large global banks would have failed to meet a draft version of the Basel leverage rule had the standard been in force at the end of last year, according to data published by the Basel committee on Sept. 25. Concerns that banks can reduce their capital requirements by simply changing how they measure the risk of losses on their assets have prompted calls from some supervisors for more reliance on leverage limits, on the grounds that they are harder for lenders to game.
The group, which brings together regulators from 27 nations including the U.S., U.K. and China, is in “a good position” to complete work on the leverage ratio rule “toward the end of the year or sometime early next year,” Ingves said.
Under the committee’s timetable, banks will be expected to publish how well they measure up to the rule from Jan. 1, 2015, with the measure to become binding in 2018.
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Rohatyn’s CapAsia CEO Bastin Sued for Defamation in Singapore
CapAsia’s founding Chief Executive Officer Vijay Sethu sued Johan Bastin, his successor at the Rohatyn Group-owned private equity firm in Singapore, claiming Bastin impugned him by suggesting he was front-running a deal.
Sethu is seeking unspecified damages for defamation and a restraining order against Bastin to stop him from making any further disparaging comments, according to a lawsuit filed in Singapore High Court. Bastin has denied the allegations.
“Our client’s position is that the lawsuit is entirely without merit,” Bastin’s lawyers Hri Kumar and Shivani Retnam said in an e-mail.
Bastin, who replaced Sethu as CEO in 2009, said in his defense filing that the lawsuit was filed with the motive of harassment.
“My client is very confident in the Singapore legal system and that the merits of his case will be proved at trial,” Sethu’s lawyer Edmund Kronenburg said.
Sethu, after being replaced as CEO, remained at CapAsia as the head of one of its funds and later as a consultant before leaving in November.
CapAsia manages $400 million in assets across three funds, according to its website. The firm is owned by New York-based Rohatyn, an emerging markets asset manager founded by former JPMorgan Chase & Co. (JPM) bankers, and Malaysia’s CIMB Group Holdings Bhd. (CIMB)
The case is Sethu v. Bastin, S612/2013, Singapore High Court.
Algorithmic Trading on Commodities Futures Seen Doubling by Man
Algorithmic trading for electronic commodities futures doubled from about 20 percent to 40 percent in the past two years, Scott Kerson, head of a commodities unit at Man Group Plc (EMG), said in a presentation for the London Bullion Market Association conference in Rome yesterday.
There is a “reasonable” chance that will double again in next few years, he said. Kerson heads commodities at Man Systematic Strategies and AHL.
U.S.-EU Derivatives Spat Not Part of Trade Talks, Froman Says
U.S. Trade Representative Michael Froman said negotiations with the European Union on derivatives regulation are taking place outside the context of talks on a transatlantic free-trade agreement.
EU financial-services chief Michel Barnier said on Sept. 13 that the U.S. needs to ease the burden its new rules will place on European firms. Froman told reporters in Brussels yesterday that the negotiations involve the European Commission, the U.S. Commodity Futures Trading Commission and the International Organization of Securities Commissions.
Froman said the U.S.-EU trade talks would include financial services in the context of market access. While declining to give specific examples on issues, he said that derivatives rules would be handled “in parallel and on the side of the negotiations” via two-party and global discussions.
Obamacare Needs to Be ‘Refined Over Time,’ Lesser Says
Richard Lesser, president and chief executive officer at Boston Consulting Group Inc., talked about the outlook for implementation of the Affordable Care Act and federal budget negotiations.
Lesser spoke with Tom Keene, Sara Eisen, Matthew Dowd and Scarlet Fu on Bloomberg Television’s “Surveillance.”
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Sweden Says Banks Shouldn’t Grow at Faster Pace Than Economy
Sweden’s efforts to reduce bank system risk should also ensure the industry doesn’t grow at a faster pace than the economy, Financial Markets Minister Peter Norman said.
“The dream scenario would be that the economy grows a little bit faster than the bank sector,” Norman said yesterday in an interview in Stockholm.
The government of Prime Minister Fredrik Reinfeldt has told its four biggest banks to hold larger capital buffers than those set elsewhere in Europe in an effort to protect taxpayers from financial industry risk.
Nordea Bank AB (NDA), Svenska Handelsbanken AB (SHBA), Swedbank AB (SWEDA) and SEB AB must hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015. The Basel Committee on Banking Supervision sets a 7 percent floor and a 2019 deadline.
Separately, The European Banking Authority needs more resources to keep up with its workload, Andrea Enria, its chairman, said in prepared remarks on the agency’s website.
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