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SEC Credit-Risk Rule, Swaps Rules, Solvency II: Compliance

The U.S. Securities and Exchange Commission is seeking comment on a rule that would let broker-dealers use internal assessments instead of outside ratings in gauging credit risk for meeting net capital requirements.

SEC commissioners voted 5-0 yesterday to propose a measure that would strip references to credit ratings from standards that determine how much liquidity broker-dealers must maintain to cover their obligations. The proposal is part of a Dodd-Frank Act requirement to replace ratings in federal regulations with an “appropriate” standard for gauging risk.

Dodd-Frank, the regulatory overhaul enacted in July, sought to ban references to credit ratings after lawmakers faulted inflated grades from firms such as Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit for fueling the housing bubble before the 2008 credit crisis.

Yesterday’s proposal would revise provisions of the Securities Exchange Act of 1934 affecting how broker-dealers may reduce the value deducted from less-risky assets such as commercial paper, preferred stocks and nonconvertible debt when figuring their net capital.

Compliance Policy

CFTC Proposes Protecting Swaps User Margin From Peer Default

The Commodity Futures Trading Commission approved a proposal to allow swaps users who post collateral to a clearinghouse to have their margin protected against another investor’s bankruptcy, a move that may increase trading costs.

A clearinghouse “would have recourse against the collateral of defaulting customers, but not against the collateral of non-defaulting customers” should both a futures broker and one or more of its customers fail, the CFTC said in a proposal summary released yesterday. BlackRock Inc., the world’s largest asset manager, advocated in a November letter to the CFTC for this approach because it afforded protection against “fellow customer risk.”

That will lead to clearinghouses requiring more money from swaps users in either margin or a separate type of fund known as guaranty, said Lauren Teigland-Hunt, managing partner of New York-based Teigland-Hunt LLP, a law firm that represents hedge funds and institutional investors.

The proposal differs from how futures margin is handled by clearinghouses. In that case, if a customer of a futures broker causes the broker to default, the other customers of the broker can be tapped for margin payments to cover the shortfall.

Chairman Gary Gensler and Commissioners Bart Chilton, Michael Dunn and Scott O’Malia voted to approve the proposed rule, with Commissioner Jill Sommers voting against it. The proposal now enters a public comment period, after which the commission could issue a final rule.

For more, click here.

CFTC, SEC Propose Exempting Insurance From Swaps Regulation

Financial regulators voted to propose rules excluding insurance policies, home heating oil contracts and forwards tied to commodities from swaps regulations required under the Dodd-Frank Act.

The U.S. Commodity Futures Trading Commission and Securities and Exchange Commission, at separate Washington meetings yesterday, proposed a joint rule defining which types of trades will face rules aimed at limiting risk and boosting transparency in the $583 trillion global swaps market. The proposal also determines when transactions fall under the jurisdiction of the CFTC or SEC. Commissioners voted 5-0 at the SEC, while the CFTC voted 4-1 to open the proposal to public comment before it’s finalized.

Under the proposal, credit-default swaps tied to indexes of nine or more securities would be regulated by the CFTC, while such swaps linked to narrower indexes would be overseen by the SEC. Foreign currency options and currency swaps would be regulated as swaps under Dodd-Frank, while the Treasury Department is considering whether to exclude foreign exchange swaps and forwards for most of the law’s clearing and trading requirements.

Transactions regulated by the Federal Energy Regulatory Commission aren’t included in the swap definition rule and would be subject to a separate waiver process.

The proposal also sets up a system for overseeing mixed swaps that don’t fall exclusively under the oversight of the CFTC or SEC.

For more, click here.

For video of the SEC open meeting, click here.

SEC Proposes Definitions for Security-Based Swaps Regulations

The U.S. Securities and Exchange Commission will seek comment on definitions for security-based swaps that aim to clarify the agency’s authority over trading of derivatives.

The commissioners voted 5-0 yesterday to propose a series of definitions that would shape the trading and regulation of derivatives including certain credit-default swaps.

The SEC and Commodity Futures Trading Commission are required by the Dodd-Frank Act to establish parallel regulatory systems for derivatives markets, with the SEC overseeing security-based swaps and the CFTC regulating all others. The definitions exclude already regulated insurance products and consumer transactions such as home heating oil contracts, according to a CFTC summary.

Yesterday’s vote by SEC commissioners opens the agency’s proposal to public comment for 60 days.

Largest Dutch Banks Face ‘Too-Big-to-Fail Rules’ Before Others

The Netherlands’ biggest lenders will be subject to “too-big-to-fail” measures ahead of international guidelines because of the size of the nation’s banking industry, the country’s central bank said, following the lead of Switzerland, the U.K. and Sweden.

The Dutch central bank “opts to roll out the framework to all Dutch systemically important financial institutions at the same time,” the Amsterdam-based institution said in a report yesterday, without specifying which lenders it was referring to. The Financial Stability Board allows regulators to apply the framework to globally systemically important banks first, ahead of nationally relevant institutions.

The five biggest Dutch banks’ total assets make up more than four times the country’s gross domestic product, Morgan Stanley said in a report dated April 26. The biggest of those are ING Groep NV, Rabobank Groep and ABN Amro Group NV.

The Group of 20 nations agreed in November there should be tougher rules for lenders that would threaten the wider financial system if they collapsed, forcing them to increase their ability to cover losses. The FSB asked the Basel Committee on Banking Supervision to draft the global requirements for these systemically important financial institutions, or SIFIs.

Compliance Action

French Insurance Market Meets Solvency Rules, Noyer Says

Recent tests show that French insurance companies meet European capital requirements known as Solvency II, Bank of France Governor Christian Noyer said.

The European Union’s latest quantitative impact study shows “the entire French insurance industry passes the Solvency II tests without major difficulties,” he told insurance executives yesterday in Paris. Still, some individual institutions “have significant work left to do.”

The Solvency II plan, an effort to provide a common regulatory framework for all insurers within the 27-nation EU, will come into effect on Jan. 1, 2013.

Barclays Chief Says U.K. Bank Report May Cause Costs to Rise

Barclays Plc Chief Executive Officer Robert Diamond said returns and dividends may be affected if the U.K.’s Independent Commission on Banking implements proposed rule changes.

Diamond told the company’s annual general meeting in London yesterday that the bank is “working through the detail of the questions” raised by the ICB’s interim report published this month. The government-appointed commission recommended that the U.K.’s biggest banks boost capital, implement plans for an orderly bankruptcy and build fire breaks around their consumer units to protect the financial system.

Royal Bank of Scotland Group Plc CEO Stephen Hester said last week that creating fire breaks around lenders’ retail units won’t make them safer and RBS Chairman Philip Hampton said the plans will increase costs for clients and investors.

Barclays has been working with the Financial Services Authority to establish a system to give customers access to essential banking services even in the event of a crisis, the bank said.

Barclays expects to have these plans “fully in place” with the FSA within the next 12 months, Diamond said.

Egypt Extends Deadline for Earnings Reports by a Month

Egypt’s financial markets regulator has extended the deadline for companies to send their earnings reports for 2010 and the first quarter of this year by a month.

The Cairo-based Egyptian Financial Supervisory Authority made the announcement in an e-mailed statement. It didn’t say what the old deadline was.

Regeneron Is Latest Stock Halted by Circuit Breakers

Regeneron Pharmaceuticals Inc. became the latest stock halted by circuit breakers yesterday.

The curbs were created after the 20-minute rout on May 6, 2010, erased $862 billion from the value of U.S. shares before prices rebounded. The pause lasts five minutes for Standard & Poor’s 500 Index and Russell 1000 Index companies as well as more than 300 exchange-traded funds when they rise or fall at least 10 percent within five minutes.

New rules proposed by exchanges on April 5, 2011, would shift the market to a limit-up/limit-down system that prevents shares from moving more than a certain amount.

For a table listing the securities that have been halted by U.S. circuit breakers since they were implemented in June 2010, according to data compiled by Bloomberg, click here.

Apple Risks Following Google as Europe Leads Privacy Probes

Apple Inc. may face greater scrutiny in the European Union than the U.S. as regulators investigate possible data-privacy lapses betraying the location of iPhone and iPad users.

The Apple probes in Europe echo similar inquiries that have dogged Google Inc. over wireless Internet data collected by its Street View service, said Nick Graham, head of the London Internet and data protection group of law firm SNR Denton.

Regulators in Germany, France and Italy said last week they are checking whether Apple’s iPhone and iPad products violate privacy rules by tracking, storing and sharing data about the locations of users. Irish officials are also examining “a number of complaints about this issue,” Diarmuid Hallinan, a spokesman for the country’s data protection commissioner, said in an e-mail today.

U.S. lawmakers this week sent letters to six companies, including Apple and Google to determine how location data is stored on mobile device systems and how it’s transmitted.

Apple, based in Cupertino, California, said yesterday it isn’t tracking the users’ location and plans to reduce the amount of data the iPhone stores.

For more, click here.


Sony Faces Lawsuit, Regulators’ Probe Over PlayStation Hack

Sony Corp. faced a legal and regulatory backlash over delays in telling 77 million subscribers that their personal account data may have been stolen by a hacker.

A lawsuit filed April 26 in federal court in San Francisco alleges the delay left PlayStation users exposed to losses related to any credit-card data theft. Makiko Noda, a Tokyo-based Sony spokeswoman, declined to comment, as the company hadn’t received a notice of legal action.

Sony slumped the most since the aftermath of the March 11 earthquake on concern the fallout will set back efforts to compete against Apple Inc. and Microsoft Corp. in online movies and games. Sony warned customers of the security breach on April 26, six days after closing the PlayStation Network and Qriocity video- and music-streaming services.

The Tokyo-based company said it notified consumers as quickly as it could.

In the lawsuit, plaintiff Kristopher Johns, of Birmingham, Alabama, seeks to represent people who bought a PlayStation console, subscribe to either PlayStation Network or Qriocity service and “suffered loss of service and break of security,” according to the complaint.

Sony said on April 26 that it was trying to determine whether credit-card data were stolen. The intruder obtained user-provided names, e-mail addresses, birthdates, login information and purchase history, Sony said on its blog.

Separately, the U.K. and Irish information watchdogs will investigate the hacking of Sony Corp.’s PlayStation Network after the company warned 77 million customers may have had their personal data stolen.

The Irish Office of the Data Protection Commissioner said it asked Sony for a report on the breaches. The U.K. Information Commissioner’s Office said it will make additional inquiries before deciding whether to take further action.

The company reported the intrusion to the Federal Bureau of Investigation office in San Diego that specializes in cybercrime, the New York Times said on its website. Darrell Foxworth, an FBI special agent in San Diego, said he can neither confirm nor deny whether there is an investigation.

The case is Johns v. Sony Computer Entertainment America LLC, 11-02063, U.S. District Court, Northern District of California (San Francisco).

Comings and Goings

Draghi Pick for ECB Needs German Consent, Merkel Aide Says

Germany asserted the power to block Mario Draghi as the successor to European Central Bank President Jean-Claude Trichet after the Bank of Italy governor won France’s endorsement.

Steffen Seibert, a spokesman for German Chancellor Angela Merkel who spoke to reporters yesterday in Berlin, noted that Italy and France have backed Draghi’s candidacy.

“Notwithstanding, there will be no appointment to the ECB presidency without German approval,” Seibert said.

While Seibert said Germany would cooperate with France in the appointment, the decision by French President Nicolas Sarkozy to back Draghi puts pressure on Merkel to follow suit or risk rankling her biggest European partners. Portugal and Belgium yesterday added their support for the Italian.

The leader of Europe’s largest economy, Merkel has yet to indicate a preference for a successor to Trichet. The pick may become tied up in German opposition to bailouts.

Under EU voting rules, Germany wouldn’t be able to block Draghi on its own. It would need anywhere from one to five other countries to amass enough votes for a veto.

For more, click here.

Sokol Misled Buffett, Violated Trading Rules, Board Audit Finds

David Sokol violated Berkshire Hathaway Inc.’s insider-trading rules and misled the company about his personal stake in Lubrizol Corp., which he recommended as a takeover target to Chairman Warren Buffett, the firm said.

An 18-page report released April 26 by Berkshire’s audit committee portrayed Buffett as a victim of deception and said the company should weigh suing Sokol, 54, to recover his trading profits. The U.S. Securities and Exchange Commission is probing whether Sokol bought Lubrizol shares on inside information that Buffett was considering a buyout, according to a person who declined to be identified because the investigation is secret.

Buffett, 80, is facing questions about his oversight of managers and criticism for not condemning the stock trading that preceded Sokol’s resignation from Omaha, Nebraska-based Berkshire. Buffett had said March 30 in announcing Sokol’s departure that he didn’t believe the trades were unlawful.

Sokol was previously considered a candidate to replace Buffett as Berkshire’s chief executive officer.

Sokol “would not, and did not, trade improperly, nor did he violate any fair reading of the Berkshire Hathaway policies,” according to a statement from William Levine, a lawyer for Sokol at Dickstein Shapiro LLP in Washington.

For more, click here.

U.K. SFO General Counsel to Join McGuireWoods as Lawyers Depart

The U.K. Serious Fraud Office’s general counsel will join U.S. law firm McGuireWoods LLP, adding to the list of lawyers leaving for private practice as the agency faces possible closure by the government.

Vivian Robinson will join the firm’s London office, Richmond, Virginia-based McGuireWoods said in a statement yesterday. At least five other top lawyers have left the agency this year as it faces dissolution under plans to create an economic crime agency.

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