EU Scrutiny, Warren’s Enforcers, Fed: Compliance

Dec. 3 (Bloomberg) -- High-frequency traders face European Union limits on the number of orders they can place, as well as requirements to tell regulators how their computer algorithms work.

They wouldn’t be allowed to exceed a “ratio of orders to transactions executed” under draft EU proposals obtained by Bloomberg News. Carlos Tavares, chairman of the Committee of European Securities Regulators, or CESR, said in an interview on Nov. 29 that regulators have to understand the trading to be certain “there aren’t any embedded market abuse practices.”

The Commodity Futures Trading Commission, the top U.S. commodity regulator, said in October it would review algorithmic trading and other practices such as “spoofing” and “quote stuffing” as part of the Dodd-Frank financial legislation, the largest rewrite of Wall Street rules since the 1930s.

The EU measures are part of an overhaul of the Markets in Financial Instruments Directive, or Mifid, scheduled to be published Dec. 8 by Michel Barnier, the European Union’s financial services commissioner.

The proposals would give a new European Securities and Markets Authority powers to write EU-wide rules for transparency waivers for dark-pool transactions and to notify national regulators of policy breaches.

For more, click here.

Compliance Policy

Elizabeth Warren Recruits Dodd-Frank Enforcers From 50 States

Elizabeth Warren, the Harvard University law professor deputized by President Obama to police consumer finance, is recruiting 50 state prosecutors to help. She may even decide to bankroll their work.

The attorneys general say they are now invited to the nation’s capital and talk with Warren by telephone almost weekly as she sets up the Bureau of Consumer Financial Protection. On Nov. 30, Warren traveled to Fort Lauderdale, Florida, to plot strategy at the prosecutors’ winter meeting.

Bernard Nash, a law partner at Dickstein Shapiro LLP in Washington, said Warren’s alliance with state prosecutors will strengthen both her hand and theirs. It will also antagonize banks, who opposed the creation of the consumer bureau.

The Dodd-Frank financial overhaul that became law in July revamped the relationship between federal agencies and state enforcers, and Warren has seized on that change.

The law gives state attorneys general the authority to enforce regulations written by the new bureau in court, and allows the agency to take part in the case. A vote by a majority of the states can force the bureau to consider adopting a new regulation.

For more about Warren and attorneys general, click here.

Separately, Warren said the new agency should require greater simplicity in credit-card agreements instead of writing rules to ban abusive practices.

In her most detailed comments yet on how the agency might regulate credit cards, Warren said the Credit Card Accountability Responsibility and Disclosure Act of 2009 relied too much on a strategy of prohibition. Warren cited as an example one credit-card issuer who sought to circumvent the law’s prohibition on “hair-trigger” provisions that raise interest rates automatically when a cardholder falls behind on a payment. Instead, the issuer raised the card’s interest rate and promised a waiver or rebate for customers who paid on time, a practice she said had already been banned. Warren didn’t identify the issuer.

The Federal Reserve has since proposed amending the rule, Warren said.

For more about Warren and credit cards, click here.

Stock Exchanges Said to Seek Extension of Circuit-Breaker Test

U.S. equity markets will ask the Securities and Exchange Commission to extend the pilot program of trading curbs for stocks that was implemented after the May 6 plunge, two people with direct knowledge of the discussions said.

The requests, which will be submitted to the regulator next week, will be for at least three months, the people said.

Exchanges are working with the SEC and Financial Industry Regulatory Authority to update the single-stock circuit breaker program implemented in June for Standard & Poor’s 500 Index companies to include limits on how much prices can swing before trading is halted. The curbs were extended to Russell 1000 Index stocks and more than 300 exchange-traded funds in September. They pause trading across markets in a security for five minutes when it rises or falls at least 10 percent within five minutes.

The pilot program, which is scheduled to last through Dec. 10, was introduced by U.S. exchanges and Finra after the May 6 stock market crash that briefly erased $862 billion in less than 20 minutes. The circuit breakers operate between 9:45 a.m. and 3:35 p.m. New York time.

Eric Ryan, spokesman for NYSE Euronext, declined to comment, as did Robert Madden at Nasdaq OMX Group Inc. and Stacie Fleming at Bats Global Markets. NYSE and Nasdaq are based in New York and Bats has its headquarters in Kansas City, Missouri. William Karsh, chief operating officer of Direct Edge Holdings Inc. in Jersey City, New Jersey, also declined to comment.

The additional months may give exchanges and regulators more time to alter the existing circuit-breaker program to include a mechanism, known as “limit-up, limit-down,” that prevents trades from occurring above or below certain prices.

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China Regulator Denies Speculation About Futures Manipulation

China’s futures industry regulator denied speculation that a foreign financial company contributed to a Nov. 12 stock market slump by manipulating trading in index futures.

Song Anping, deputy director of the Department of Futures Supervision at the China Securities Regulatory Commission, said in a telephone interview that it would be “very unlikely for global banks or other global institutions to manipulate the index futures market” because no foreign institutions have been “officially” allowed into the market.

China started index futures trading in April in a push to ease stock-market volatility and give investors a way to protect themselves against equities swings. The country has yet to allow so-called Qualified Foreign Institutional Investors, or QFIIs, to trade index futures under a program that gives them access to China’s equity market.

Solvency II Introduction Needs Transition Period, Ceiops Says

A new risk-based regulatory framework for European insurers should be introduced with a transition period, the regulator developing the rules said.

“We shouldn’t postpone the introduction of Solvency II, but rather phase in the implementation,” Gabriel Bernardino, chairman of the Committee of European Insurance and Occupational Pension Supervisors, or Ceiops, said at a conference in Paris yesterday.

Frankfurt-based Ceiops is developing Solvency II together with local supervisors in Europe. The rules, scheduled for introduction in 2013, have been tested by the industry in a fifth quantitative impact study, named QIS5. Ceiops plans to publish the results of the study in March, secretary general Carlos Montalvo said in an interview on Oct. 22.

FASB to Negotiate on Fair-Value, New IASB Head Tells Les Echos

The U.S. Financial Accounting Standards Board “is ready to move towards a more balanced approach” on whether to apply fair-value accounting to all financial assets, a position that has threatened convergence with the London-based International Accounting Standards Board, Les Echos said, citing IASB incoming president Hans Hoogervorst.

The two groups should have finished harmonizing international accounting standards to be applied worldwide when Hoogervorst takes office on July 1, he told the newspaper.

“IASB governance needs to be strengthened” and accounting standards should be kept clear and consistent to avoid confusion for investors and the general public, Hoogervorst said, according to the newspaper.

Special Section: Fed Borrowing Disclosure

Fed Reveals Foreign Banks Loans, Some Collateral Data Withheld

Federal Reserve data showing UBS AG and Barclays Plc ranked among the top users of $3.3 trillion from emergency programs is stoking debate on whether U.S. regulators bear responsibility for aiding other nations’ banks.

UBS was the biggest borrower under the Commercial Paper Funding Facility, with $74.5 billion overall, more than twice as much as Citigroup Inc., the top U.S. bank recipient, according to the data released yesterday. London-based Barclays took the biggest single amount under another program that made overnight loans, when it got $47.9 billion on Sept. 18, 2008.

The first detailed accounting of U.S. efforts to spare European banks may add to scrutiny of the central bank, already at its most intense in three decades. The Fed, which released data on 21,000 transactions, said in a statement that its 11 emergency programs helped stabilize markets and support economic recovery. The Fed said there have been no credit losses on rescue programs that have been closed.

For three of the Fed’s six emergency facilities, the central bank released information on groups of collateral it accepted by asset type and rating, without specifying individual securities. Among them was the Primary Dealer Credit Facility, created in March 2008 to provide loans to brokers as Bear Stearns Cos. collapsed.

Fed spokeswoman Susan Stawick in Washington declined to comment.

The secrecy surrounding Fed bailouts led lawmakers to demand disclosure after the central bank approved aid dwarfing the federal government’s $700 billion Troubled Asset Relief Program.

For more on the Fed and foreign banks, click here.

For more about the collateral disclosures, click here.

For a video report by Bloomberg’s Lizzie O’Leary on the European banks topping the list of borrowers accessing the Fed funds, click here.

Eisenbeis Says Fed Disclosures Raise More Questions

Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc., discussed the Federal Reserve’s report on users of its $3.3 trillion in emergency programs.

Eisenbeis spoke with Erik Schatzker on Bloomberg Television’s “InsideTrack.”

For the video, click here.

Compliance Action

South Korea Doesn’t Plan to Adjust Capital Control Steps

South Korea isn’t considering adjusting the timing and strength of measures to rein in rapid foreign capital inflows into the country because of North Korea-related issues, Financial Supervisory Service Governor Kim Jong Chang said.

The country may consider reintroducing taxes on bond holdings by foreigners, adjusting the limit on banks’ foreign-currency derivatives products or introducing bank levies for capital control, he said.

Facebook Seeks Friends in Washington as Privacy Concerns Mount

Facebook Inc. is expanding its Washington office and consulting with privacy advocates as lawmakers question how well the world’s largest social-networking site protects the personal information of users.

The company is looking for a public-policy expert and a deputy press spokesman, following the June hiring of Marne Levine to head its Washington office. Levine is a former top aide to Larry Summers, director of President Barack Obama’s National Economic Council. The new hires would bring Facebook’s Washington team to eight, up from zero three years ago.

Tighter privacy rules being discussed in Washington might limit the ability of companies such as Facebook and Google Inc. to tailor ads to users of their sites and curb sales growth.

Congress, the Federal Trade Commission and the Commerce Department are considering how to impose additional privacy safeguards on Internet companies that amass user data, and the White House in October established a task force of more than a dozen federal offices to address privacy concerns.

The FTC yesterday called for a “do-not-track” option for Internet users to allow them to block monitoring of their online movements, used to compile profiles for marketers.

The company says it gives users the ability to determine how much information they share, and that Facebook policies prohibit revealing details that identify individuals to third parties.

For more, click here.

Buyout Funds Locked in India Microfinance IPO Delays

Private-equity companies may struggle to recoup almost $565 million in investments in India’s microfinance industry since 2006 after a regulatory backlash led at least two firms to delay initial public offerings.

Temasek Holdings Pte, billionaire George Soros and Sequoia Capital are among investors who have put money into the world’s largest market for micro-loans as lending and profits swelled. The boom culminated with the IPO of Sequoia-backed SKS Microfinance Ltd., which raised 16.3 billion rupees ($357 million) in August.

The risks associated with the industry were highlighted in October, when India’s southern Andhra Pradesh state capped loan rates and cracked down on recovery tactics, causing lending and collections to slump and private equity-backed micro-lenders to postpone share sales, Bloomberg Businessweek reports in its Dec. 6 edition.

Micro-lenders are barred from taking deposits in India, making them vulnerable to swings in repayments. An industry lobbying group said the microfinance companies may seek emergency funds from banks.

Sequoia is among funds that will curtail investment in the industry until the federal government sets unified national rules, Sumir Chadha, Sequoia’s India head, said in an interview from Mumbai.

Michael Vachon, a spokesman for Soros in New York, couldn’t be reached after office-hours for comment. A spokesman for Temasek declined to comment.

For more, click here.

Courts

JPMorgan Sued for $6.4 Billion Over Madoff Fraud

JPMorgan Chase & Co., Bernard Madoff’s “primary banker,” was sued for $6.4 billion by the trustee liquidating the imprisoned con man’s former firm.

Irving H. Picard, the lawyer appointed as trustee by a New York bankruptcy court, said in a statement that he sued JPMorgan yesterday over claims the bank aided and abetted Madoff’s fraud. Picard said his suit seeks $1 billion in fees and $5.4 billion in damages because the bank was “willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff,” David J. Sheehan, counsel to Picard, said in the statement.

Any money recovered from JPMorgan will be returned to Madoff’s victims on a pro rata basis, Picard said.

“JPMorgan did not know about or in any way assist in the fraud orchestrated by Bernard Madoff,” the bank said yesterday in a statement. JPMorgan, the second-biggest U.S. bank, called Picard’s claims “irresponsible and over-reaching.”

The bank, based in New York, said it has assisted Picard in his investigation of Madoff’s firm.

The lawsuit was filed under seal in U.S. Bankruptcy Court in Manhattan, according to Picard’s statement.

The case is Picard v. JPMorgan Chase & Co., 10-ap-4932, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Ex-Homestore Chief Stuart Wolff Settles SEC Lawsuit

Stuart Wolff, the imprisoned former chief executive officer of Homestore Inc., agreed to pay $11.9 million to settle a Securities and Exchange Commission lawsuit accusing him of inflating the company’s revenue.

Wolff didn’t admit or deny the securities fraud allegations as part of the agreement, the SEC said in a filing in federal court in Los Angeles. Wolff’s lawyer, John Gibbons, didn’t immediately return a call seeking comment.

Wolff, 47, was sentenced to 4 1/2 years in prison in April after pleading guilty to conspiring to commit securities fraud.

The case is Securities and Exchange Commission v. Stuart H. Wolff, 05-03132, U.S. District Court, Central District of California (Los Angeles.)

Interviews/Speeches

SEC’s Hu Says Regulators Will Always Trail Market Innovators

The U.S. Securities and Exchange Commission official in charge of spotting risk to financial markets said the agency will never be able to match the pace of industry innovation even as it expands its understanding of complex financial instruments.

“There’s no question that the people in industry will always be far ahead of regulators,” Henry Hu, the outgoing head of the SEC’s Division of Risk, Strategy and Financial Innovation, said yesterday at the Hedge Funds New York conference sponsored by Bloomberg Link. “We don’t want to be so far behind that we can’t see them on the horizon.”

Hu, who joined the SEC in 2009 to lead the newly created unit, is leaving the agency to return to the University of Texas, where he is a professor.

For more, click here.

Financial Overhaul to Boost Physical Commodities, Fan Says

The most sweeping rewrite of Wall Street rules since the 1930s will encourage traders to invest in physical commodities, potentially keeping supply off the market and affecting prices, said Jennifer Fan, a partner and senior portfolio manager with Arrowhawk Commodity Strategies, a hedge fund in Darien, Connecticut.

Fan made the remarks yesterday at the Bloomberg Link Hedge Fund and Investor Briefing in New York during a panel titled Timing the Peak of the Global Commodities Rush.

For more, click here.

Toronto-Dominion Won’t Give Guidance on Basel Impact

Toronto-Dominion Bank doesn’t plan to give specific guidance on the impact of new capital requirements, Chief Executive Officer Edmund Clark said yesterday, adding that the bank will have no trouble meeting the standard under the rules.

Banks have until 2019 to meet an overhaul of bank regulation drawn up by the Basel Committee on Banking Supervision. National Bank of Canada told investors this week it expects to meet that target by the end of 2012.

Canadian Imperial Bank of Commerce Chief Risk Officer Tom Woods told investors yesterday the bank expects to have its capital ratios above the 2019 minimums by Nov. 1, 2012.

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

To contact the editor responsible for this report: David E. Rovella at drovella@bloomberg.net.