CFTC Swaps Pushback, Iceland-Hedge Funds, Rabobank: Compliance

The largest Wall Street banks are mobilizing to fight a new policy by the U.S. Commodity Futures Trading Commission that gives the regulator broader authority in overseas derivatives deals.

The policy, issued Nov. 14, negates a legal interpretation that banks have been using to keep some swaps trades off electronic platforms and away from CFTC rules enacted to make the market less opaque. The firms and their lawyers say the announcement, which the agency published as a “staff advisory,” is written so broadly it could expose their overseas deals to even more U.S. regulation.

Within hours of its release, bank lobbyists met to discuss possible legal action against the agency and began contacting members of Congress, according to people involved in the pushback. The next day, CFTC Chairman Gary Gensler was getting letters from lawmakers saying he was upsetting the $693 trillion market by issuing policy with little consultation.

The question of how to apply U.S. derivatives rules in foreign jurisdictions has been debated since the Dodd-Frank regulatory overhaul began to take shape. The biggest banks sometimes trade half their swaps with overseas clients. Gensler has fought to extend his agency’s reach.

He defended the policy in New York yesterday at an industry conference held by swap execution facilities, the new platforms where most swaps are supposed to trade. Gensler said the policy ensures equal treatment for market players.

The advisory has also reopened a rift between the CFTC and European regulators. In July, Gensler had reached an agreement with his counterparts to defer to foreign authorities when the CFTC finds their rules to be comparable -- a deal seen as benefiting the largest banks.

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Compliance Action

Rabobank Said to Avoid EU Libor Fine After Collusion Bids

Rabobank Groep, the Dutch lender fined 774 million euros ($1.04 billion) by U.S., U.K. and Netherlands regulators for rigging interbank lending rates, will escape a European Union antitrust fine this year, two people familiar with the probe said.

Rabobank isn’t among a group of lenders settling a case over manipulation of yen Libor and will avoid punishment at this stage, said the people, who asked not to be identified because the EU’s decision isn’t yet public. More than half a dozen banks are set to be fined as part of a settlement with the EU in the yen Libor case, one of the people said.

Rabobank made as many as 384 internal attempts to rig yen Libor, the U.K.’s Financial Conduct Authority said last month. As part of a “collusive effort” to manipulate rates, staff also sent at least 10 requests outside the bank and received seven from others, the FCA said.

Antitrust regulators have “a harder case to make” than financial watchdogs because they need to show a conspiracy between traders, said Robert Fleishman, a lawyer at Steptoe & Johnson LLP in Brussels.

The Dutch lender declined to comment on whether it would be fined by the Brussels-based commission. Antoine Colombani, a spokesman for the EU regulator, also declined to comment.

Avoiding punishment in the first wave of fines doesn’t mean the bank is immune from future penalties if the EU antitrust arm decides to revisit the dossier, said one of the people.

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Iceland Tells Hedge Funds Not to Bet on 75% Claims Writedown

Iceland’s government says speculation by creditors in the island’s failed banks, many of which are hedge funds, that they will need to take a 75 percent writedown on their claims is an exaggeration.

Creditors in Iceland’s failed banks are trying to reach an agreement with the island’s authorities on how to treat $3.8 billion in krona-denominated claims without triggering a currency slump. Iceland has said it won’t lift capital controls unless creditors accept writedowns as the nation tries to avoid a balance of payments crisis.

The government, elected in April after promising to help households through debt relief, estimates it will be able to unwind capital controls in place since 2008 within six months of striking a deal with creditors.

A number of the creditors waiting to get their money back are hedge funds that had bet on a faster resolution of Iceland’s banks. Firms including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP, bought claims on lenders’ assets at prices well below face value.

Though most creditors have yet to be repaid, Iceland’s crisis management program has won international praise and the $14 billion economy is now growing faster than the euro area.

Courts

MF Global Brokerage to Pay $100 Million Fine in CFTC Case

MF Global Holdings Ltd.’s brokerage unit was fined $100 million and forced to admit to allegations in a lawsuit filed by the U.S. Commodity Futures Trading Commission over customer losses sustained in the company’s 2011 failure.

U.S. District Judge Victor Marrero in Manhattan on Nov. 8 signed a consent order for the fine, to be paid after MF Global Inc. fully recompenses customers and certain other creditors. The penalty is part of a June settlement under which the company agreed to pay about $1 billion in compensation to customers. About 90 percent of that money has already been distributed.

The judge yesterday directed MF Global to pay about $290 million of the judgment to a federal bankruptcy trustee within five business days.

The CFTC sued MF Global and company officials including former Chief Executive Officer Jon Corzine in June for failing to properly supervise employees as the firm spiraled toward bankruptcy in 2011. The day the suit was announced, the agency said it had a settlement with the brokerage unit, MF Global Inc., to pay about $1 billion in restitution to clients and the $100 million penalty.

“Judge Marrero’s action is procedural and confirms one of the bases for the MF Global Inc. trustee’s recent motion and the bankruptcy court’s order granting authority to make 100 percent distributions to former commodity customers,” Kent Jarrell, a spokesman for the MF Global brokerage trustee, James Giddens, said in a statement. “The trustee intends go forward with the distributions subject to possible appeals.”

The Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.

Interviews

Clegg Presses Case for Higher U.K. Property Tax on Foreigners

U.K. Deputy Prime Minister Nick Clegg pushed the case for raising the tax on top-end properties owned by foreign investors in London, as the government examines the idea in the run-up to its end-of-year financial statement.

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

Chancellor of the Exchequer George Osborne is considering levying capital gains tax on foreigners selling property in the U.K. to curb rising house prices in the capital, Sky News television first reported earlier this month. Overseas demand is adding to pressure on a market experiencing a shortage of supply.

“There are parts of the London property market now which are entirely divorced from and dislocated from the rest of the economy,” Clegg said. “That’s partly because they’re driven by market forces which are global and by very, very large amounts of money flowing into the residential property market as investment.”

Clegg’s Liberal Democrats, the minority party in the ruling coalition, have made higher taxes on the most expensive properties a key policy with demands for a so-called mansion tax on homes valued at more than 2 million pounds ($3.2 million.) Their Conservative partners have rejected the idea.

Mersch Says ECB’s Stress Tests May Cover Three-Year Period

European Central Bank Executive Board member Yves Mersch said stress tests on euro-area banks will probably simulate three years of negative economic conditions as part of a check on the financial system’s health.

“Our deliberations are tending toward these tests having a three-year horizon, to the end of 2016,” Mersch, who is helping to oversee the ECB’s preparations to become the currency bloc’s bank supervisor, said he sees the horizon extending to the end of 2016.

He made the remarks at a conference in Frankfurt yesterday. Mersch said there would be a base scenario and a so-called stress- or worst-case scenario.

Setting a time horizon should help banks gauge which definition of capital under international rules will be used in the stress tests.

By the end of 2016 banks need to hold 5.125 percent common equity core tier 1 capital, which includes a buffer against losses. That rises to 5.75 percent on Jan. 1, 2017.

East Europe Loan Growth Needs to Be Monitored, Nowotny Says

European Central Bank Governing Council member Ewald Nowotny said strong loan growth in some eastern European countries needs close monitoring by regulators to avoid another bubble like the one that burst in 2009.

It was difficult to tell whether some emerging European economies had been overheating or converging with western neighbors before the recession that started in most of eastern Europe in 2009, Nowotny, the Austrian central bank’s governor, told journalists on the sidelines of a conference in Vienna. That process may still blur the picture, he said.

Western European lenders led by Austria’s Raiffeisen Bank International AG (RAIFF), Erste Group Bank AG (EBS) and UniCredit Bank Austria AG bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. Bad loans have shot up since 2009 and are weighing on bank balance sheets.

Credit was still contracting in Hungary, the Baltics and Croatia in the second quarter of this year and grew less than 5 percent per year in Poland and Slovakia, the Vienna Initiative group of international lenders said last month. It continues to grow by more than 15 percent in Turkey, Russia and Belarus.

The European Union’s eastern members that aren’t using the euro -- including Poland, Hungary, the Czech Republic, Bulgaria, Romania and Croatia -- should consider joining the ECB-led joint bank supervision, Nowotny said.

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

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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