EU CDS Curbs, China-U.S. Talks, Austrian Banks: Compliance

European lawmakers called for restrictions on traders’ use of credit-default swaps to profit from defaults on sovereign debt they don’t own.

The European Union Parliament in Strasbourg, France, also voted in favor of a ban on short selling of government bonds in the EU unless traders have at least “located and reserved” in advance the securities they intend to sell.

Pascal Canfin, a French lawmaker who is responsible for the legislation in Parliament, described the vote as “a strong political message.” Negotiations on the measures with governments in the 27-nation region will continue next week, he said.

The Parliament is seeking tougher curbs on short selling and sovereign CDS than those supported by most EU governments. The assembly called for a ban on the buying and selling of credit-default swaps on European Union nations’ debt, unless the buyer either owns the underlying security or another asset whose market price moves in close tandem with it. That would allow investors to take out insurance if they know that a default would harm their non-sovereign holdings such as shares in companies in the defaulting nation.

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Compliance Policy

China Said to Discuss Letting SEC Probe Mainland Companies

U.S. and Chinese officials will meet next week to discuss giving American securities regulators the right to investigate companies within China for the first time, said two Chinese officials with direct knowledge of the plans.

Representatives from the Securities and Exchange Commission and the Public Company Accounting Oversight Board will meet with counterparts from the China Securities Regulatory Commission in Beijing from July 11 to 12, said the officials, who asked not to be named because the talks are private.

A joint delegation from the SEC and PCAOB will share “technical and practical information regarding audit inspection and cross-border oversight,” according to Colleen Brennan, a PCAOB spokeswoman. John Nester, an SEC spokesman, declined to comment.

Dozens of companies traded in the U.S. have disclosed auditor resignations or accounting irregularities this year, leading to the suspension or delisting of their shares. Some of the SEC’s investigations of such companies have been stalled by the inability to gather information in China.

Regulators in the Asian nation haven’t felt pressure to immediately address oversight of companies publicly traded in the U.S. because they weren’t responsible for approving the listings, one of the officials said.

The meetings next week will discuss the feasibility of U.S. regulators conducting field inspections of auditors and companies in China, the officials said. They also will include talks focused on companies that list in the U.S. through reverse mergers, said one of the Chinese officials.

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Lehman Crisis Shows U.K. Needs Bigger Payment System, BOE Says

The U.K. must increase the number of banks that participate in its large-value payment system to eliminate risks to financial stability, said Chris Salmon, chief cashier at the Bank of England.

With 18 firms serving the entire sterling-denominated banking industry, the current system “introduces unnecessary risk and change is needed,” Salmon said in a speech in Leeds, England, yesterday. In the speech, he used Lehman Brothers as an example of evidence of the “case for change.”

The situation in the U.K. compares with Hong Kong, where all licensed banks must be members of the large-payment system, and the U.S., where there are more than 7,000 participants, Salmon said. With a small number of members, more transactions must be settled indirectly in a so-called tiering problem, raising risks of intraday credit risk in case one of the banks involved in a payment arrangement runs into trouble.

The Bank of England may consider measures to boost membership of its large-value payment system to reduce risks, Salmon said. Currently, some intraday credit lines may exceed 10 percent of the intermediating banks’ core Tier 1 capital.

The central bank published a report in May that showed U.K. lenders could experience liquidity restrictions within an hour if a firm stops or reduces its transfers through the nation’s large-value transaction system.

Austria Doesn’t See Capital Surcharge for Nation’s Top Banks

Austrian regulators won’t pursue a capital surcharge for the country’s biggest banks as European policymakers debate how to adapt at the national level new rules to make global “too-big-to-fail” lenders safer.

In an effort to prevent another financial crisis, the Basel Committee on Banking Supervision said last month that banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital. As many as 30 banks worldwide may face such surcharges. The debate is now turning to banks whose collapse could unsettle a particular country’s banking system even if they are too small to cause global havoc.

Helmut Ettl and Kurt Pribil, co-chairmen of Austrian financial supervisor FMA, said nations should have leeway to apply capital surcharges and other rules selectively and shouldn’t be forced to slap a surcharge on banks that are systemically important on a national level.

The European Commission is due to discuss new rules for national systemically important financial institutions, or SIFIs, Ettl said.

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CFTC Budget Includes ‘Unsustainable’ Hiring, O’Malia Says

The U.S. Commodity Futures Trading Commission isn’t spending enough on technology to track the $601 trillion global swaps market and is adding employees who face “potential downsizing” as Congress seeks to rein in budget deficits, said Scott O’Malia, a commission member.

The CFTC’s $202.7 million budget for fiscal 2011 provides $5.4 million for technology related to new Dodd-Frank Act requirements and funding for 50 new employees, according to O’Malia’s June 15 dissent from the agency’s budget plan. The dissent was released yesterday.

Dodd-Frank, the financial overhaul enacted last year, requires the CFTC and Securities and Exchange Commission to write new rules for the swaps market after largely unregulated trades helped fuel the 2008 credit crisis. The agencies are slated to miss most of the July deadlines for the new rules governing trades made by banks including Goldman Sachs Group Inc. and Morgan Stanley.

The Republican-controlled U.S. House of Representatives voted June 16 to cut the CFTC’s funding by 15 percent, or $30 million.

The cuts to the agency’s funding would “significantly curtail the timely, effective implementation” of the new derivatives rules, the Obama administration said in a statement.

Steve Adamske, CFTC spokesman, didn’t immediately respond to a request for comment.

Compliance Action

U.S. Regulators Issue Guidance on Counterparty Credit Risk

U.S. banking regulators issued new guidance on counterparty credit risk management for large banks, stressing the need for adequate controls and measurement systems.

The Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision said yesterday the financial crisis of 2007-2009 “revealed weaknesses” in counterparty credit risk management “at many banking organizations.”

The regulators pointed to the “shortcomings” in the ability of banks to determine exposures in a timely way, and noted “poor selection” of counterparty credit risk metrics.

Counterparty credit risk “management techniques have evolved rapidly over the last decade, along with increased complexity of derivative instruments,” the regulators said. “Implementation of sound practices has been uneven across business lines and counterparty types.”

Regulatory guidance, while not binding like a rule, is used by bank examiners to set standards for financial institutions.

EU Parliament Votes on Bancassurance, OTC Derivatives

Lawmakers in the European Parliament voted yesterday to amend rules for supervisors of so-called bancassurance companies, firms that have both insurance and banking arms.

Existing legislation in the 27-nation European Union should be adjusted to ensure that authorities can apply both banking and insurance regulation to such firms, the Parliament said in Strasbourg, France, yesterday. The clarification was proposed last year by the European Commission, the EU’s executive arm.

Separately, the parliament endorsed measures to force some trading of over-the-counter derivatives through clearinghouses in a bid to safeguard financial markets.

Lawmakers approved proposals to empower the European Securities and Markets Authority to decide on types of derivatives that should be centrally cleared. Traders that flout the rules would face penalties including fines.

The parliament agreed that members of its economic and monetary affairs committee should continue negotiating with governments on the measures, with a view to holding a further vote once a deal has been reached.

The EU assembly and national governments must agree on the final wording of the measures before they can enter into force.

Exchange-Traded Funds Said to Face Review by U.K. Fraud Office

U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the proper tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

No specific companies or products have been targeted in the probe at this point, the person said.

The Serious Fraud Office, which prosecutes white collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England’s Financial Policy Committee have warned of a lack of transparency in the ETF market.

ETFs are exchange-listed products that mirror indexes, commodities, bonds and currencies and allow investors to buy and sell them like stocks. They became more popular in the aftermath of the 2008 selloff that wiped $37 trillion from global equity markets because they carry lower fees than other funds, require lower initial investment than futures, can be traded throughout the day and cover most indexes.

The agency is looking more closely at ETFs because they have similar characteristics to the CDOs that helped spark the financial meltdown in 2008, according to the person.

FSA Chief Executive Officer Hector Sants said June 24 that there are “question marks” regarding whether synthetic ETFs are appropriate for all types in the retail marketplace. Sam Jaffa, a spokesman for the SFO in London, declined to comment. Rachel Cohen, a spokeswoman at the FSA, declined to comment other than to refer to Sants’s previous remarks.

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Standard Chartered Sued in Singapore Over Madoff ‘Feeder Fund’

Standard Chartered Bank Plc was sued by two groups of Dubai-based investors in Singapore claiming they lost $10 million after being misled into investing in funds that channeled money to Ponzi scheme operator Bernard L. Madoff.

American Express Bank Ltd., which has since been acquired by Standard Chartered, had misrepresented Fairfield Sentry Ltd. as an “extremely stable” investment, the investors said in two lawsuits filed with the Singapore High Court. The bank also claimed it performed “extensive due diligence” on Fairfield, a so-called feeder fund in Madoff’s Ponzi scheme, according to court papers submitted by the investors.

The two groups of former clients were experienced investors who knew of the risks involved, Standard Chartered said in filings on June 27. The London-based bank denied misleading the investors and wasn’t responsible for their investment decisions, it said in the filing.

Ally Lim, a Singapore-based spokeswoman at Standard Chartered, declined to comment, as did Niru Pillai, the lawyer representing both groups of investors.

The cases are Tradewaves Ltd. v Standard Chartered Bank S337/2011 and Jitendra Gopaldas Bhatia v Standard Chartered Bank S338/2011 in the Singapore High Court.

Ex-Primary Global Consultant Pleads Guilty in Insider Case

Walter Shimoon, the former Primary Global Research LLC consultant charged in a nationwide probe of insider trading, pleaded guilty to conspiracy and securities fraud.

Shimoon, who pleaded guilty to two counts of conspiracy and one count of securities fraud, faces as many as 30 years in prison. His sentencing is scheduled for July 8, 2013 in Manhattan federal court. Shimoon is cooperating with prosecutors.

In a parallel lawsuit, the U.S. Securities and Exchange Commission alleged Shimoon spoke with people from at least 11 hedge funds over 14 months and leaked stock tips to some of them.

Shimoon, a former Flextronics International Ltd. manager, was arrested in December with three other defendants and charged with conspiracy and wire fraud.

Also charged with Shimoon were former Primary Global executive James Fleishman; Mark Anthony Longoria, who worked at Advanced Micro Devices Inc.; and Manosha Karunatilaka, a former account manager at Taiwan Semiconductor Manufacturing Co.

Longoria and Karunatilaka have pleaded guilty. Fleishman is scheduled to be tried next month on two counts of conspiracy.

Winifred Jiau, a former Primary Global consultant, was convicted of securities fraud and conspiracy June 20 in Manhattan federal court.

The case is U.S. v. Shimoon, 10-mj-2823, U.S. District Court, Southern District of New York (Manhattan).


Berkowitz Says ‘Not a Lot New’ in SEC Probe of St. Joe

Bruce Berkowitz, St. Joe Co.’s chairman and biggest shareholder, said there is “not a lot new” in last week’s announcement that the U.S. Securities and Exchange Commission started a formal investigation of the company and his money-management firm.

“It was my decision” to disclose the stepped-up probe, he said yesterday in an interview with Erik Schatzker on Bloomberg Television’s “Inside Track.” Berkowitz, founder of Miami-based Fairholme Capital Management LLC, said he released the information in the July 1 filing so St. Joe wouldn’t be hindered in resuming a stock-purchase program.

Berkowitz declined to comment on the intent of the SEC investigation.

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Golub Says Dodd-Frank Will Have ‘Malignant’ Consequences

Harvey Golub, former chairman of American International Group Inc., discussed negotiations to raise the U.S. debt ceiling, bank regulation, the Dodd-Frank law and the housing market.

Golub spoke with Betty Liu on Bloomberg Television’s “In the Loop.”

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Yan Says China’s Banking Industry Lacks Transparency

May Yan, an analyst at Barclays Plc, talked about China’s banking industry.

Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national auditor’s estimate, and the industry’s credit outlook could decline, Moody’s Investors Service said. Yan spoke in Hong Kong with John Dawson on Bloomberg Television’s “First Up.”

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Comings and Goings

Robert Jenkins Named to BOE’s Financial Policy Committee

Chancellor of the Exchequer George Osborne appointed Robert Jenkins to the Bank of England’s Financial Policy Committee, replacing Richard Lambert.

Jenkins is chief executive officer and managing partner of Combinatorics Capital, and professor of finance at the London Business School, the Treasury said in an e-mailed statement in London yesterday. He has previously worked at Citibank, Credit Suisse Group AG and F&C Asset Management Plc.

Lambert said in May that he wouldn’t take up his place on the FPC, saying that he wanted “to devote my time to a wider range of aspects of public policy.”

The government established the FPC to help prevent a repeat of the financial crisis, and it will operate on an interim basis alongside the central bank’s Monetary Policy Committee.

The panel has five Bank of England officials including Governor Mervyn King, plus Adair Turner and Hector Sants of the Financial Services Authority. They sit alongside three external members -- Former Federal Reserve Vice Chairman Donald Kohn, former Deutsche Bank AG official Michael Cohrs and former Bank of England Executive Director Alastair Clark.

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