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Position Limits, Bank ‘Living Wills,’ Antitrust: Compliance

The U.S. Commodity Futures Trading Commission may increase risk of manipulation and volatility in markets for oil, gas and other commodities unless new speculation limits apply similar treatment to physical-settled and cash-settled derivatives, Senator Maria Cantwell said.

Cantwell, a Washington Democrat who supports so-called position limits, made the comment in an Oct. 14 letter to CFTC Chairman Gary Gensler, whose agency is scheduled to vote on Dodd-Frank Act rules to impose the restrictions at a meeting in Washington today.

In a January proposal, the CFTC supported conditional position limits that would allow larger positions in cash derivatives markets. Chicago-based CME Group Inc., the world’s biggest futures exchange, objected to the plan’s different treatment of the physical-delivered derivatives market, which it dominates, and the cash-settled market primarily controlled by Atlanta-based IntercontinentalExchange Inc.

The CFTC may change the rule to narrow differences between the two markets, Bloomberg News reported on Sept. 22.

Separately, the top U.S. derivatives regulator is slated to vote today whether to curb trading in oil, wheat, gold and other commodities after a boom in raw-materials speculation, record-high prices and years of debate and delay.

The rule calls for traders to aggregate their positions, a change that may affect large firms with multiple strategies. It also would tighten an exemption allowing so-called bona fide hedgers to exceed the caps.

The rule has been among the most controversial provisions of the Dodd-Frank financial overhaul, enacted last year, which gave the CFTC the authority to limit trading in over-the-counter commodity swaps as well as exchange-traded futures. The proposal would limit the number of contracts a single firm can hold.

The legislation gave the commission jurisdiction over the estimated $300 trillion U.S. derivatives market, and the CFTC has proposed more than 50 rules. The agency missed deadlines to impose position limits in energy and metals markets by mid-January and agricultural markets by April. A revision of the rule proposed in January is to be voted on today.

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Compliance Policy

Fed Approves Final Rule on Banks’ ‘Living Will’ Wind-down Plans

The Federal Reserve approved a final rule implementing the Dodd-Frank Act’s requirement that the largest bank holding companies design a plan in the event of their own bankruptcy.

The so-called living wills must “describe the company’s strategy for rapid and orderly resolution in bankruptcy during times of financial distress,” the Fed said yesterday in a statement in Washington.

The Federal Deposit Insurance Corp. board voted unanimously on Sept. 13 to release a joint final rule laying out what the largest and most complex financial firms must include in living wills.

Congress, in the Dodd-Frank Act, expanded regulators’ authority to seize and unwind lenders in response to the market tumult that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc. The new rules are designed to eliminate the need for bailouts by giving the FDIC power to liquidate large firms whose failure could threaten the financial system.

The largest U.S. banks, including Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp., will have to develop annual strategic plans that describe the specific actions the companies would have to take in resolution. The plans must also describe the company’s organizational structure and its interconnections to other firms, according to the Fed.

EU Boosts Defense Rights Amid Backlash Against Antitrust Raiders

European Union antitrust regulators bolstered companies’ rights of defense in the wake of a backlash from companies including Intel Corp. over the fairness of procedures in competition probes.

Companies may now ask an independent arbiter to step in during disputes with regulators over the confidentiality of documents and when they are concerned about answering questions that could incriminate them, the European Commission said in an e-mailed statement yesterday.

The EU’s hearing officer will now be able to act during the early stages of an antitrust probe, in disputes during merger investigations and negotiations on settlements of cases, the commission said. Regulators will also give companies more information on the status of a probe, tell them how possible fines may be calculated, give them more details of evidence submitted by rivals or customers and explain why it rejects complaints.

German Ministry Open to Discuss Separation of Investment Banking

Proposals to separate investment and retail banking are “interesting approaches” for international talks about financial-market regulation, German Finance Ministry spokesman Johannes Blankenheim said.

“These ideas” should be discussed “intensively” at the international level, he said. Blankenheim made the remarks to reporters yesterday in Berlin.

Bjoern Saenger, a lawmaker from Chancellor Angela Merkel’s Free Democratic Party pro-market coalition ally, said in an e-mailed statement he welcomes the ministry’s readiness to discuss a separation and is looking forward to any proposals.

The debate in Germany comes after the U.K. government decided to force lenders to insulate their consumer-banking units by 2019 as Chancellor of the Exchequer George Osborne seeks to shield customers and taxpayers from another financial crisis.

Separately, Germany’s saving banks and cooperative banks welcome the discussions on a separation between investment banking and customer business, Die Welt reported, citing Uwe Froehlich, president of the country’s DSGV savings bank association.

Constraints Seen for Market Makers Under Volcker Rule on Trading

Confusion about what constitutes proprietary trading under the Volcker rule may spur banks to reduce market making for customers, according to Craig Pirrong of the University of Houston and Thomas Gira of the Financial Industry Regulatory Authority.

Firms will spend less to service clients, Pirrong, a finance professor specializing in risk management, said in a telephone interview. The proposals may have a chilling effect on some businesses, according to Gira, executive vice president of the oversight organization for the securities industry.

The rule, named for former Federal Reserve Chairman Paul Volcker, was part of last year’s overhaul to rein in risky trading by firms whose customer deposits are federally insured. Concern is growing among banks that it will sometimes prove impossible to distinguish between proprietary transactions and trading done for the benefit of clients.

Separately, Citigroup Inc., the third-biggest U.S. lender, said it’s closing a proprietary-trading unit that incurred losses in the third quarter, as regulators prepare to restrict banks from making bets with shareholder cash.

The company is almost “two-thirds done” winding down the Equity Principal Strategies unit, according to Chief Financial Officer John Gerspach said yesterday in a conference call with analysts. Market turmoil caused a revenue decline for the unit, which suffered losses as it exited trading positions, Gerspach said.

Chief Executive Officer Vikram Pandit, 54, is shutting the business as lawmakers draft the so-called Volcker rule, which aims to restrict banks from making bets with shareholder money. Other firms including Goldman Sachs Group Inc. and Morgan Stanley already have exited similar businesses. New York-based Citigroup partly blamed Equity Principal Strategies for a 73 percent slump in third-quarter revenue from equities-trading.

The Federal Reserve drafted the proposal, released on Oct. 11, with three other agencies. The public can comment until Jan. 13. A final version is slated to take effect on July 21, 2012.

“Larger banks will have to ring-fence an entity to do their market making,” Aaron Brown, chief risk manager at hedge fund AQR Capital Management LLC in Greenwich, Connecticut. “It will shake things up and open the field to new competitors because big franchises will have to reorganize.”

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Senate Subcommittee Plans Hearing on Exchange Traded Funds

The Subcommittee on Securities, Insurance and Investment will examine exchange-traded funds, in a hearing on Capitol Hill tomorrow, the committee said in statement on its website.

Witnesses expected to testify at the hearing include Eileen Rominger, Director of the Division of Investment Management at the Securities and Exchange Commission, Eric Noll, Executive Vice President Transaction Services at NASDAQ OMX, Noel Archard, Managing Director at BlackRock I-Shares, and Harold Bradley, Chief Investment Officer at Ewing Marion Kauffman Foundation, according to the committee’s statement.

Compliance Action

EU Approves Belgium’s Takeover of Dexia Unit Pending Probe

The European Commission gave temporary approval to Belgium’s takeover of Dexia SA’s local consumer-lending unit pending an expanded probe into the rescue.

Dexia will be broken up after Belgium agreed earlier this month to pay 4 billion euros ($5.5 billion) for the retail banking division and to guarantee 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets.

Regulators must approve the terms for government rescues of banks and has required banks to sell off assets to compensate for the state support.

Belgium has to submit a restructuring plan for the bank within six months that shows “adequate burden sharing by all involved of the restructuring costs” and “sufficient measures” to compensate for the distortions of competition, the commission said.

Dexia will sell assets, including its Luxembourg unit and its French municipal lending arm, to give the bad bank capital to absorb future losses.

SMBC Nikko Said to Be Dropped From Japan International Bond Sale

SMBC Nikko Securities Inc. will be eliminated as a lead manager for Japan International Cooperation Agency’s bond sale following a probe into insider trading, according to two people with knowledge of the matter.

JICA, as the state-run agency is known, is expected to announce the decision today, the people said, declining to be identified as the matter is confidential. The sale of about 20 billion yen ($259 million) in bonds to individual investors in December will be managed by Daiwa Securities Group Inc. and Mitsubishi UFJ Morgan Stanley Securities Co., one of the people said.

SMBC Nikko spokesman Kiyoo Kuniyoshi declined to comment.

The brokerage said on Oct. 6 that it is being investigated by Japan’s Securities and Exchange Surveillance Commission for a possible insider trading violation by an executive.

“We are fully cooperating with the commission’s investigation,” SMBC Nikko, a unit Sumitomo Mitsui Financial Group Inc., said in an e-mailed statement that day, declining to comment further.

Tognum Probes $32 Million in Payments to Korean Sales Agent

Tognum AG, which is being acquired by Daimler AG and Rolls-Royce Group Plc, uncovered at least 23 million euros ($32 million) in commissions at its MTU Friedrichhafen unit that may have been wrongfully paid in connection with sales of defense-related products in South Korea.

Tognum, the high-speed diesel engine manufacturer, confirmed the probe in an e-mailed statement and said the results of the investigation may be released this week.

Some funds were used to host members of the Korean military at Asian vacation resorts and night clubs, according to a management summary of a draft report obtained by Bloomberg News that was prepared for Tognum by Ernst & Young GmbH. The document, part of an internal review, focused on commissions paid to a South Korean businessman.

Ernst & Young recommended an examination of compliance at Tognum’s units outside Germany, the accounting firm said in the advisory section of the draft report dated Sept. 26.

Ernst & Young spokesman Dag-Stefan Rittmeister declined to comment on the report. Daimler spokeswoman Ute von Vellberg declined to comment, saying it is an issue for Tognum. Rolls-Royce didn’t immediately reply to e-mails seeking comment. South Korean Defense Ministry spokesman Kwon Ki Hyun said he couldn’t immediately comment when contacted by phone.

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Deloitte Faulted by PCAOB Over Unresolved Audit Deficiencies

Deloitte & Touche LLP repeatedly failed to support assumptions in audits examined in a 2007 inspection, the Public Company Accounting Oversight Board said in the first public report of unresolved deficiencies involving one of the so-called Big Four accounting firms.

The firm’s quality controls and independence systems give “cause for concern,” the PCAOB said in its report, which was released yesterday. The nonprofit gives audit firms at least a year to fix deficiencies.

The PCAOB in 2007 looked at Deloitte’s practices through inspections at the company’s New York headquarters and 18 other offices. The report made public yesterday lays out instances in which the firm insufficiently weighed clients’ valuation of assets and income-tax assumptions and faulted Deloitte’s independence procedures.

“In our drive for continuous improvement, we have been making a series of investments focused on strengthening and improving our practice,” Deloitte Chief Executive Officer Joe Echevarria said in a statement.

The disclosure isn’t a disciplinary action, said Colleen Brennan, a PCAOB spokeswoman.

Companies See More Litigation From Stricter Regulation, FT Says

An increase in corporate lawsuits is expected in the U.S. and the U.K. next year, the Financial Times reported, citing a survey in-house lawyers at 405 companies conducted by the law firm Fulbright & Jaworski, LLP.

More than 90 percent of U.S. companies and 85 percent of U.K. companies see litigation rising or remaining the same next year, the newspaper reported. Tighter regulation was cited as top reason for predicted increase, according to the paper.


Ex-Deloitte Partner’s Wife Settles SEC Case for $1 Million

Annabel McClellan, the wife of an ex-Deloitte Tax LP partner, agreed to pay $1 million to settle a U.S. Securities and Exchange Commission lawsuit alleging she and her husband tipped family members to merger deals.

The SEC will drop claims against her husband Arnold McClellan, who headed one of Deloitte’s regional mergers and acquisitions teams, if a federal judge approves his wife’s settlement, said Daniel Bookin, his attorney.

Annabel McClellan didn’t admit wrongdoing, according to a consent of final judgment filed yesterday in federal court in San Francisco. Robert Tashjian, an SEC lawyer in San Francisco involved in the case, declined to comment.

McClellan, who pleaded guilty in April to one count of obstructing the SEC’s investigation, said she overhead her husband talking about the deals and passed the information to her brother-in-law, according to court records.

Nanci Clarence and Nicole Neubert, lawyers for Annabel McClellan, didn’t immediately return messages seeking comment about the settlement.

“When the SEC was able to review all the evidence, they recognized that Mr. McClellan had done nothing wrong,” Bookin said in a telephone interview yesterday.

The case is U.S. v McClellan, 10-5412, U.S. District Court (San Francisco).


Schaeuble Says ‘Bold Steps’ Required to Resolve Crisis

German Finance Minister Wolfgang Schaeuble discussed the sovereign-debt crisis, fiscal consolidation and efforts to stabilize Europe’s banking system.

Schaeuble said he expects the European Union’s regulators to make decisions that will ensure that the bloc’s biggest banks have enough capital to deal with the sovereign debt crisis. He also said the euro region will use the enhanced European Financial Stability Facility “in a flexible way and in the most efficient way. I think we will get it.”

He spoke at London’s Chatham House.

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Solvency II Will Be Fully Applied From 2014, Van Hulle Says

Solvency II, a proposed risk-based regulatory framework for European insurers, will be fully applied from January 1, 2014, Karel van Hulle, head of the European Commission’s insurance and pensions unit, said at a conference in Berlin yesterday.

“Europe’s council, commission and parliament have all agreed that there shouldn’t be a big bang,” van Hulle said. “The transition regime will unfold during 2013.”

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