Dodd-Frank Defense, Swap-Rule Delay, Basel: Compliance

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U.S. Representative Barney Frank will make the short walk across Capitol Hill this week to defend the financial-regulation law that bears his name.

Frank, a Massachusetts Democrat, will testify for the Senate Banking Committee tomorrow, the one-year anniversary of the enactment of the Dodd-Frank Act. As chairman of the House Financial Services Committee, Frank and his staff played a leading role in drafting the legislation.

Senate Banking Chairman Tim Johnson, a South Dakota Democrat, will hold the hearing to review progress on the law enacted by President Barack Obama. Federal regulators have spent the last year drafting and implementing the hundreds of rules required by the law, which was almost unanimously opposed by Republican lawmakers.

Frank, who lost his chairmanship in January when Republicans took control of the House, has defended the law and said this month that Republicans were “bluffing” in their efforts to make major revisions or repeal the law.

Federal Reserve Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and acting Federal Deposit Insurance Corp. chairman Martin J. Gruenberg are also scheduled to testify at the Senate hearing.

Compliance Policy

CFTC Proposal May Give Clearinghouses Time to Accept Swaps

The U.S. Commodity Futures Trading Commission may re-propose a Dodd-Frank Act rule to allow clearinghouses more time before they must decide whether to accept and guarantee trades in the $601 trillion swap market.

CFTC commissioners meeting in Washington yesterday were expected to consider easing a proposal that called for clearinghouses to immediately accept or reject executed trades. The new proposal would require decisions as soon as technologically possible, “milliseconds or seconds, or, at most, a few minutes, not hours or days,” according to a CFTC summary of the rule.

“The proposed rule promotes market participants’ access to central clearing, increases market transparency and supports market efficiency,” CFTC Chairman Gary Gensler said in a statement prepared for the meeting.

Dodd-Frank, the financial-regulation overhaul enacted last year, aims to reduce risk in the swaps market after largely unregulated transactions helped fuel the 2008 credit crisis. Clearinghouses, which are capitalized by their members, seek to mitigate risk by guaranteeing trades and standing between buyers and sellers.

The CFTC proposal released in March was opposed by swaps and derivatives industry groups, which argued that requiring immediate trades would limit risk-management tools and increase systemic risk.

The revised measure would also establish rules governing documentation standards between swap dealers and their clients.

For more, click here.

Indonesia Government, Lawmakers at Impasse on Financial Agency

Indonesian lawmakers and the finance ministry are struggling to reach an agreement on the composition of a planned financial regulator before a July 23 deadline, the head of a parliamentary committee said.

The Financial Services Authority parliamentary working committee met with Finance Minister Agus Martowardojo yesterday and today to try to reach a compromise, and a plenary session will be held July 21, committee chairman Nusron Wahid said yesterday in Jakarta. The working group is scheduled to disband July 23.

Parliament plans to approve the draft law for the regulator, known in the Indonesian language as Otoritas Jasa Keuangan, or OJK, “soon,” Achsanul Qosasih, a deputy chairman of the working committee, said in June. The agency is due to start operating in January 2013, he said at the time.

Swap-Trading Platforms Would Face Fewer Limits Under Bill

Derivatives regulators would be barred from adopting Dodd-Frank Act rules restricting the number of market participants who must receive or respond to price quotes on new trading facilities in the $601 trillion swaps market, under a bipartisan bill introduced in the U.S. House.

The bill aims to require the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission to allow for flexibility in the types of trading methods on so-called swap execution facilities. The CFTC proposed a rule in December that would allow participants in the trading facilities to request price quotes from a minimum of five possible sellers. The SEC on Feb. 2 proposed a rule that would allow swap buyers to request a quote from a single seller.

In addition to bipartisan support, the bill also received support from the Investment Company Institute, a trade association representing mutual funds, and the Wholesale Markets Brokers’ Association, Americas, which represents interdealer brokers.

The House legislation would also bar regulators from requiring trading platforms to display or delay quotes for any amount of time and prohibit agencies from restricting the methods of commerce that may be used to execute the transaction.

Steve Adamske, CFTC spokesman, declined to comment, saying the agency hasn’t reviewed the legislation.

Bloomberg LP, the parent company of Bloomberg News, intends to register as a swap-execution facility, Ben Macdonald, global head of fixed income at the company, said in a June 3 letter to the CFTC.

Special Section: Basel III Impact

EU Seeks to Triple Banks’ Reserves, Publishes Impact Study

The European Union proposed boosting minimum capital and liquid assets at more than 8,300 banks to stave off insolvency amid complaints the plans may hamper the region’s economic recovery.

Michel Barnier, the EU’s financial-services commissioner, proposed implementing global rules approved by the Basel Committee on Banking Supervision to bolster banks’ ability to withstand a crisis. Banks would be expected to hold core capital amounting to 7 percent of their assets adjusted for risk, more than tripling current requirements. EU proposals to meet global capital rules will require the region’s banks to raise 460 billion euros ($653 billion) in funds, Barnier said today.

The definition of capital will also be toughened, under the rules to be phased in by 2019.

“The banking sector will have to hold more capital and better quality capital every time it is taking risks,” Barnier said in a statement today. “It is a tremendously important step forward in learning the lessons of the crisis and adopting a new approach to risk.”

The European Commission published on its website a study showing the likely impact of its proposals to beef up capital and liquidity rules for banks.

The EU overhaul adds to pressure on banks to bolster their reserves after stress tests revealed that eight lenders have a combined 2.5 billion-euro shortfall in the capital they need to cope with a future financial shock.

For more, click here.

Separately, twenty-eight banks would face capital surcharges because they are systemically important if international rules to rein in too-big-to-fail banks were applied today, global regulators said.

The Basel Committee on Banking Supervision disclosed on its website yesterday how authorities will apply capital surcharges for the world’s most systemically important banks, guiding investors in calculating extra funds that lenders deemed too big to fail must raise.

The surcharge plans were approved July 18 by the Financial Stability Board at a meeting in Paris.

Regulators are at loggerheads with some banks over the additional capital rules, with lenders arguing the requirements may harm the global economic recovery. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Bank of America Corp. CEO Brian T. Moynihan are among bankers who have suggested that the new rules will constrain lending and hurt the economy.

The Basel group is seeking views on its formula for determining which lenders should have to hold as much as 2.5 percentage points more capital according to the risk they pose to the global economy.

HSBC Holdings Plc, Citigroup Inc., Deutsche Bank AG and BNP Paribas SA may face the highest additional capital requirements, Morgan Stanley analysts said in a note last month. Other lenders that may be subject to the highest surcharge include Bank of America Corp., JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc, the analysts said.

Separately, Standard & Poor’s said in a report yesterday that European banks may seek to raise additional capital after last week’s stress tests revealed their riskiest investments and showed a need to curb their dependence on governments.

Regulators Force Banks to Cut Contingent Convertible Plans

Global regulators’ decision to stop banks from using contingent convertible bonds to meet planned capital rules may cut the market for the securities by about half.

Lenders will only be able to use common equity to meet additional capital requirements for the world’s largest banks, Mario Draghi, chairman of the Financial Stability Board, which has to approve proposals put forward by Basel regulators, told reporters in Paris on July 18. His comments came after the Basel Committee on Banking Supervision last month blocked the use of securities such as contingent convertibles to meet the rules.

When Credit Suisse Group AG, Switzerland’s second-largest lender, sold $9 billion of CoCos in February, Standard & Poor’s said the market could eventually surpass $1 trillion -- three times the value of all high-yield bond offerings last year. Analysts said Barclays Plc, Royal Bank of Scotland Group Plc and Deutsche Bank AG would follow.

Apart from Bank of Cyprus’s 1.3 billion-euro ($1.8 billion) CoCo in March, offerings have dried up, and investors say sales may only ever total $500 billion.

The decision leaves firms such as Swisscanto and Pacific Investment Management Co., which started a fund to buy CoCos in May, looking to invest in other bank securities such as subordinated debt and hybrid instruments.

The Basel Committee ruled last month that 30 systemically important financial institutions will have to hold an additional 1 percent to 2.5 percent of total risk weighted assets in core Tier 1 equity to reflect the danger they pose to global markets. European banks had been pushing to use hybrid securities to meet the requirements, a plan opposed by their U.S. counterparts and rejected by the Basel Committee.

For more, click here.

Compliance Action

Bats Withdraws Options Market-Maker Program Rivals Criticized

Bats Global Markets, the exchange operator planning to go public, withdrew a proposal that would have let market markets on its options venue give certain brokers better prices than those publicly available.

Joe Ratterman, the chief executive officer of Lenexa, Kansas-based Bats, wrote in a newsletter distributed yesterday that while the rule “has many elements that are broadly seen as positive” there are a “few concerns that could be better addressed.”

The so-called directed-order program was approved by the Securities and Exchange Commission three weeks ago over the objections of CBOE Holdings Inc., Nasdaq OMX Group Inc., NYSE Euronext, International Securities Exchange and BOX Options Exchange.

The Bats program would have let market makers send the exchange two prices on options contracts. One would be displayed publicly while the other, assuming the first is quoting at the national best bid or offer, would improve that price and be hidden. The second, better price would be available only to brokers directing orders to that market maker who are on a list of approved firms. Others couldn’t access it.

Germany, France Among States Warned by EU Over Telecom Rules

European Union regulators rebuked Germany, France and 18 other EU nations over late implementation of new telecommunications rules that were scheduled to enter into force on May 25.

The European Commission gave the countries two months to respond to a warning over their failure to put in place the measures, the regulator said in an e-mailed statement from Brussels yesterday.

S. Africa Says Wal-Mart Deal Approval Up to Antitrust Body

South Africa’s parliament will leave antitrust regulators to decide what conditions to impose on Wal-Mart Stores Inc.’s purchase of Massmart Holdings Ltd., a lawmaker said.

Parliament’s economic development committee began three days of hearings on the deal in Cape Town yesterday. The aim is to assess the takeover’s impact on jobs and manufacturing, said Mmathulare Coleman, the committee’s chairwoman.

The Competition Tribunal ruled on May 31 that the world’s biggest retailer could proceed with its 16.5 billion rand ($2.4 billion) purchase of a controlling stake in Johannesburg-based wholesaler Massmart on condition no jobs are cut for two years. The tribunal’s decision is being appealed by the South African Commercial, Catering and Allied Workers Union in the Competition Appeal Court.

South African Trade Minister Rob Davies has objected to the deal, saying it would have a “destabilizing” impact on the economy as a surge in imports may undermine manufacturing output.

Wal-Mart’s entry into South Africa is likely to drive down prices to the benefit of consumers and create jobs, Coenraad Bezuidenhout, acting executive director of economic policy at Business Unity South Africa, a business group, told lawmakers.

Labor unions and executives from Wal-Mart and Massmart are due to make presentations today. Unions are opposed to the takeover.

Coventry in FSA Talks Over Northern Rock Bid, Sky Reports

Coventry Building Society is in talks with the U.K.’s Financial Services Authority about creating two new forms of capital to support its offer to take over the government-owned lender, Northern Rock Plc , Sky News reported, citing people familiar with the matter.

The FSA is positive about the proposals, Sky said. The plans would involve the creation of a class of core tier 1 shares and a new loss-absorbing capital instrument, Sky said.

Comings and Goings

Treasury Elects Directors to Capital Purchase Program Banks

The U.S. Treasury Department elected directors to two banks that participated in the government’s capital purchase program under the Troubled Asset Relief Program rules.

The Treasury elected John S. Poelker and Guy Rounsaville Jr. to the board of Clayton, Missouri-based First Banks Inc.; and Gerard M. Thomchick to the board of Narberth, Pennsylvania-based Royal Bancshares of Pennsylvania Inc., the department said in a statement July 18.

Board members elected by the Treasury have the same fiduciary duties to shareholders as other board members, the department said. The new directors can’t be government employees and don’t represent the U.S. government.

The Treasury’s program gave it the right to nominate up to two members to the board of a capital-purchase program bank if the institution misses a sixth dividend or interest payment on preferred stock issued to the Treasury.

Senate’s Jerry Moran Calls CFPB Nomination ‘Dead on Arrival’

U.S. Senator Jerry Moran, a Kansas Republican serving on the Senate Banking Committee, said President Barack Obama’s nomination of Richard Cordray to lead the Consumer Financial Protection Bureau is “dead on arrival.”

Moran, who is the sponsor of legislation to restructure the bureau, made the remark yesterday at a Banking Committee hearing on consumer protection, adding that the nomination doesn’t add to the bureau’s accountability or “shed light” on its operations.

Moran is one of 44 Republicans who signed onto a May letter vowing to block any nominee to lead the bureau, which is scheduled to begin operations this week, unless changes are made to its funding mechanism and leadership structure.

Obama signed the Dodd-Frank Act into law last July 21, in the wake of an economic crisis that lawmakers and regulators said was fueled by predatory lending by financial companies. Under the law, the bureau -- organized by Harvard professor Elizabeth Warren -- becomes independent on July 21 of this year.

For more, click here.

For video of a Senate Committee Hearing, click here.


Wheeler Says Goldman Sachs May Plan Additional Job Cuts

Christopher Wheeler, an analyst at Mediobanca SpA, talks about the performance of Goldman Sachs Group Inc. and the outlook for additional job cuts.

Goldman said yesterday it will cut about 1,000 jobs after a plunge in fixed-income revenue that was bigger than analysts estimated. Wheeler speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.”

For the video, click here.

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