A U.S. regulatory proposal to broaden access to clearinghouses may help MF Global Holdings Ltd., Jefferies Group Inc. and dozens of smaller banks and brokers win entry to a market dominated by Wall Street’s biggest banks.
The Commodity Futures Trading Commission has proposed a rule that would require clearinghouses in the $583 trillion global swaps market to open membership to companies with at least $50 million in capital. ICE Trust LLC, the largest U.S. clearinghouse for credit default swaps, and LCH.Clearnet Group, the world’s largest interest rate swaps clearinghouse, both require members to have at least $5 billion in capital.
The CFTC rule, proposed in December as part of the Dodd-Frank financial-overhaul law, “would help break up the club” of derivatives dealer banks on Wall Street, said Robert Litan, vice president for research and policy at the Kauffman Foundation in Kansas City, Missouri.
Litan, a deputy assistant attorney general in the Justice Department under the Clinton administration, wrote last year that a “derivatives dealers’ club” controls clearinghouses, data providers and other parts of the market.
For the smaller banks and brokers, becoming a clearing member instead of having to work through a third party would provide a greater opportunity to win part of the lucrative business of buying and selling derivatives.
Gensler said clearinghouses could “scale” a member’s participation depending on its amount of capital. Under the proposal, a clearinghouse could require each member to hold more capital in proportion to its level of risk. Wall Street’s big banks say lowering the requirements for clearinghouses, which are capitalized by their members, may increase risk in the market.
The new clearinghouse rule is part of efforts by the CFTC and the U.S. Securities and Exchange Commission to write new derivatives regulations under the Dodd-Frank law, after largely unregulated swaps helped fuel the 2008 credit crisis.
Currently, clearinghouses have about a dozen members each.
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EPA Rules Top List of Business Complaints to Congress
American businesses, asked by a Congressional committee to identify problematic federal rules, have identified the U.S. Environmental Protection Agency as the issuer of just more than half of the rules they cited.
ConocoPhillips, Boeing Co. and the National Association of Manufacturers are among 201 companies and industry groups that responded to Representative Darrell Issa’s request to identify government rules his U.S. House Oversight and Government Reform Committee should investigate. Of the 111 regulations they cited, 57 were issued by the EPA.
Issa, who became chairman of the committee last month, planned yesterday to release a report based on the letters he requested in December. According to copies obtained by Bloomberg, among the rules the complained about were pesticide permits, air-pollution standards, the Wall Street regulatory overhaul and a proposed Energy Department rule that aims to conserve water by restricting use of multihead shower fixtures.
Last month, President Barack Obama signed an executive order calling for a government-wide review of regulations. Issa, who has accused the administration of ignoring business concerns, said in an e-mail last week he isn’t offering “judgments or recommendations.”
The effort is meant to be a “starting point” for a broader discussion, said Issa, 57, a California Republican.
Democrats and consumer-advocacy groups say they are troubled that Issa didn’t ask consumer groups about the benefits of regulations, in particular those regarding air quality or food and product safety.
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Executive Compensation Limits, Deferrals to Be Weighed by FDIC
The Federal Deposit Insurance Corp. may propose rules requiring financial companies to limit and defer incentive-based executive compensation to restrict the kind of risk-taking blamed for sparking the 2008 credit crisis.
FDIC board members, who met in Washington yesterday, were scheduled to consider a Dodd-Frank Act requirement that federal agencies prohibit incentive-based executive pay that might provide “excessive compensation, fees or benefits” or lead to material financial loss by regulated companies.
Dodd-Frank, the regulatory overhaul enacted in July, directed agencies to rein in executive pay. Policy makers had faulted compensation incentives for fueling risky lending before the credit freeze that felled Lehman Brothers Holdings Inc. forced the U.S. to bail out banks including Citigroup Inc.
FDIC Chairman Sheila Bair said last month that regulators including the Federal Reserve and the Treasury Department were nearing agreement on a proposal that would require deferrals of pay and stock awards for executives.
Bair said in a Jan. 13 CNBC television interview that the board is “very close” to an agency agreement on a rule. Regulators are preparing the new measures as banks increase salaries and shift more compensation to deferred stock and bonuses in response to criticism of pre-crisis payouts.
Housing Debate to Include Servicing Rules, Senate’s Johnson Says
The U.S. Senate Banking Committee will start its debate over how to overhaul the mortgage finance system by focusing on five issues, including improved mortgage servicing standards, its new chairman told colleagues.
Senator Tim Johnson, the South Dakota Democrat who heads the panel, outlined the committee’s agenda in a Feb. 2 memo to members that was obtained by Bloomberg News. Restructuring the housing finance system, including mortgage firms Fannie Mae and Freddie Mac, and overseeing the implementation of the Dodd-Frank financial regulatory overhaul will be the panel’s top priorities, according to the memo.
The memo also lays out Johnson’s intention to conduct close oversight of the implementation of Dodd-Frank.
Stolen Carbon Permits Won’t Enter Market, Austrian Registry Says
Austria said emissions permits traced to accounts in Liechtenstein and Sweden after disappearing in a computer-hacking attack last month will be blocked from trade as Europe seeks to shore up confidence in the market.
“The illegally transferred allowances have been frozen in accounts in Liechtenstein and Sweden,” the Austrian registry said yesterday in a statement on its website.
Legal questions about some 49 million euros ($66 million) worth of permits stolen in at least five countries have shaken a market valued last year at $110 billion. The carbon futures market wasn’t halted by the crisis.
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Banks Face Tougher Capital Rules for Derivatives Under EU Plan
Banks may be forced to hold more capital to protect them from losses on derivatives trades and securities repurchase agreements under European Union proposals.
The possible measures, designed to cut “systemic risk across the financial system,” would also encourage traders to pass derivatives deals through clearinghouses, the European Commission said in an e-mail today.
The financial crisis showed that banks “massively underestimated the level of counterparty credit risk associated with over-the-counter derivatives,” the commission, the 27-nation EU’s executive arm, said. Reviewing how lenders manage these risks “forms an integral part of the commission’s efforts” to “ensure efficient, safe and sound” markets.
The Group of 20 nations is seeking to curb potential risks from OTC derivatives, which are traded directly between counterparties or via brokers. Regulators have argued that more OTC derivatives should be centrally cleared to limit the chances that a bank’s collapse during a derivatives trade could cascade through the economy.
The EU plan follows agreements at international level by the Basel Committee on Banking Supervision, the Brussels-based commission said.
The commission is asking lenders, regulators and investors for their views on different levels of capital that banks should have to hold against possible losses on trades routed through clearinghouses, compared with transactions that aren’t centrally cleared. The groups were given until March 8 to respond.
Nasdaq Web Hack Raises Insider-Trading Concern, Consultant Says
Executives who use a Nasdaq OMX Group Inc. website for communications should ensure that no confidential information was revealed in an apparent hacking incident, according to a securities consultant.
Patrick Healy, chief executive officer at Chevy Chase, Maryland-based Issuer Advisory Group LLC, said the corporate secretary for “every corporation that uses this system” should be asking themselves about the possible exposure of their shareholder base to information that may have gotten out.
Files found on the web-based Directors Desk application prompted the exchange operator to start an investigation with federal authorities, according to a Feb. 5 statement. The trading systems of the Nasdaq Stock Market operate independently from the company’s “web-facing” services and were unaffected by the breach, according to the statement.
While the Justice Department asked Nasdaq OMX to refrain from notifying customers about the situation until Feb. 14, the company released a statement following a Wall Street Journal article on the subject.
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Belgian Regulator Sets June 6 Indicative Date for 3G Auction
Belgium’s telecommunications regulator set a June 6 indicative date for the government’s auction of the fourth so-called 3G wireless-telephony license in the country.
The regulator also said so-called 4G licenses will be sold in an auction to be held mid-October at the earliest, according to a statement published on the BIPT/IBPT’s website.
U.K. Recovers 157 Million Pounds From Barlow Clowes Collapse
The British government has recovered 156.5 million pounds ($252 million) from the Barlow Clowes Group of Companies, which collapsed in 1988 after misappropriating investors’ money for personal use, Treasury Minister Mark Hoban said.
The then Conservative government made payments ex-gratia, or without obligation, totaling 153 million pounds to 14,250 victims of the fraud after a 1989 report by the parliamentary ombudsman found the Department of Trade and Industry failed to properly supervise the company.
The recouped money comes from assets and legal action, Hoban said in a statement released by the Treasury in London yesterday. The Barlow Clowes affair is now closed, he said.
Barlow Clowes collapsed after Chairman Peter Clowes and his associates used more than 100 million pounds of investor funds for personal spending. Clowes went to prison.
Spanish Regulator Warns Cajas on Listing Rules, Expansion Says
Spain’s markets regulator has sent a letter to the savings banks association reminding the lenders that they must have at least 25 percent of shares trading if they opt for a stock listing, Expansion reported.
The regulator also advised the lenders, known as “cajas,” that intend to sell shares in newly created banks to start the process quickly because it can take a long time, the newspaper said on its website, citing Julio Segura, head of the regulator, known as CNMV.
Italian Banks’ Capital May Need ‘Strengthening,’ FSB Says
“Further strengthening the capital base of the banking sector, without undermining the supply of credit to the economy, may require the authorities’ attention going forward,” the FSB said in a statement on its website yesterday.
The FSB also said that the country’s central bank “should be legally empowered to directly and expeditiously remove bank directors and senior officers who may have become unfit for their duties.” The Bank of Italy should also have power to rejects lenders’ choice of auditor.
The Bank of Italy “has already encouraged Italian banks, particularly the largest ones, to strengthen their capital base accordingly,” it said yesterday.
Deutsche Bank May Lose Top Court Swap Case, Judge Says
Deutsche Bank AG, Germany’s biggest bank, may lose a ruling in the first case heard by the country’s top civil court over an interest-rate swap the lender sold to companies and local governments, a judge said.
The bank may have violated duties when advising Ille Papier Service GmbH, Federal Court of Justice Presiding Judge Ulrich Wiechers said at a hearing today. The lender may have had the duty to disclose an initial negative market value that covered its fees, the judge said. The judges’ assessment is preliminary, Wiechers said. A ruling is scheduled for later today.
Deutsche Bank has been sued by local governments, community-owned utilities and companies that claim the lender sold swaps without adequately disclosing risks. Cases over swap agreements used to hedge interest rates have spread through Europe with similar disputes in Italy and England.
“If the court really intends to require banks to disclose fees built into a swap, it would open a new door,” Reiner Hall, a lawyer for Deutsche Bank, told the court at today’s hearing. “This would shake up the whole market because it would require banks to disclose their profit from a deal. Such a ruling could even cause a new financial crisis.”
Altenstadt, Germany-based Ille Papier, which is seeking 541,074 euros ($738,000) from the bank in the case, lost rulings in lower courts.
The high court judges in 2006 refused to hear an appeal Deutsche Bank filed in a similar case, saying a lower court was right to find the lender at fault for not adequately informing its customer about the speculative nature of swaps.
Deutsche Bank won a majority of decisions on the swaps issue in German state appeals courts while a minority said the lender violated its duties to customers when selling the swaps and ruled, at least in part, against the bank. The Federal Court of Justice can use the case it hears now to give some guidance to the lower courts.
The German city of Pforzheim filed a suit against JPMorgan in December over 56 million euros in losses, making claims similar to those in the top court suit.
The case is BGH, XI ZR 33/10.
Obama Seeks Business Support for Lower Corporate Tax
President Barack Obama spoke about his administration’s efforts to remove barriers to business growth and job creation.
Obama, who spoke to the U.S. Chamber of Commerce in Washington, urged businesses to join him in an effort to change a “burdensome” corporate tax code, calling for “something smarter, something simpler, something fairer.”
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Levitt Says Wilpon Family May Lose Mets Over Madoff
Arthur Levitt, former U.S. Securities and Exchange Commission chairman and a policy adviser to Goldman Sachs, said the owners of the New York Mets “will probably lose” the team because of their connections to Bernard Madoff.
Levitt talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”
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