High-frequency traders may win a partial reprieve from proposed European Union rules designed to prevent a repeat of the so-called flash crash after banks and exchanges including Deutsche Bank AG and NYSE Euronext warned they could damage markets and lead to an exodus of traders.
The European Parliament may scrap plans to force firms that use algorithmic-trading programs to continue trading throughout the day, said Markus Ferber, the lawmaker writing the assembly’s response to the proposals. The measure was meant to prevent them creating volatility by diving in and out of the markets.
High-frequency traders came under increased regulatory scrutiny following the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points. The liquidity rule is one of several curbs proposed by Financial Services Commissioner Michel Barnier last year as part of a wider overhaul of an EU markets law, known as Mifid.
Barnier’s proposals would require algorithmic trading strategies to be in continuous operation during trading hours and to offer quotes at competitive prices regardless of prevailing market conditions, according to a copy of the plans published on the commission’s website.
The liquidity rule may increase costs for high-frequency trading companies and place them at a disadvantage to other traders who are allowed to withdraw from the market, NYSE Euronext warned when the plans were announced last year. This may encourage firms to shift their activities out of the 27-nation EU, it said.
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Europe Trading Tax May Wipe 10% From Stocks Value, HSBC Says
A European-wide financial transaction tax may wipe off as much as 10 percent from equity valuations and offset the benefits to the region’s economy of governments raising money, according to HSBC Holdings Inc.
The proposed tax “does present a major downside risk to both the banking sector and the broader market,” London-based HSBC analysts Robin Down and Lorraine Quoirez wrote in a report dated Feb. 9. “Investors should also anticipate a market-wide increase in the cost of both equity and debt, and major upheaval in the repo market.”
France and eight other European Union countries are seeking to introduce the levy on shares, derivatives and high-frequency trading. The European Commission in September suggested a tax of 0.1 percent on equity and bond transactions and 0.01 percent on derivatives, which it said could raise 55 billion euros ($72 billion) a year. EU finance ministers are due to discuss the tax next month.
Taxing transactions would prompt equity investors to expect higher returns from the asset class, the analysts said. The tax “as currently presented could see European valuations impacted by up to 10 percent,” they wrote.
The proposed tax would amount to about 1 percent of a typical transaction, as every purchase involves about 10 steps and each would be subject to the tariff, Down said in a telephone interview. It would therefore increase the cost of equity, or the amount a company theoretically pays investors in its shares, to about 9.5 percent from 8.5 percent and erode the value of stocks, the analysts estimated.
The European Commission estimated in September that derivatives turnover may decline as much as 90 percent in some segments, especially in high-frequency trading.
Obama Said to Request 50% Increase in CFTC Budget for Dodd-Frank
President Barack Obama will request $308 million to fund the U.S. Commodity Futures Trading Commission, the main U.S. derivatives regulator, in the 2013 fiscal year, according to a person briefed on the budget request scheduled to be announced today.
The CFTC’s budget has been the focus of a debate between Democrats seeking additional resources to complete Dodd-Frank Act rules and Republicans trying to reduce the agency’s spending as part of a broader effort to rein in deficits. The $308 million request would be a 50 percent increase from the agency’s current $205 million budget.
Congress rejected Obama’s request last year for a $308-million budget. The CFTC and Securities and Exchange Commission are leading U.S. efforts to write new rules for the derivatives market after largely unregulated swaps helped fuel the 2008 credit crisis. The agencies have set a goal to complete the regulations this year.
Reuters reported earlier on the budget.
Bachus Predicts ‘Full Exoneration’ in Ethics Investigation
The chairman of the U.S. House Financial Services Committee said he expects “full exoneration” from an ethics investigation following reports he made securities trades after being briefed by Federal Reserve Chairman Ben Bernanke during the 2008 fiscal crisis.
The Washington Post reported Feb. 10 that Representative Spencer Bachus, an Alabama Republican and the panel’s chairman, is being investigated by the independent Office of Congressional Ethics. The office opened its probe late last year and has notified Bachus that it found cause to believe insider-trading violations have occurred, the newspaper said.
In a Feb. 10 statement, Bachus said he welcomes the opportunity to set the record straight and he “fully abided by the rules governing members of Congress.”
CBS’s “60 Minutes” reported in November that Bachus and other members of Congress bought stock in companies while legislation that might affect those businesses was being debated.
The House and Senate this month passed competing versions of a proposal to strengthen the ban on insider trading by members of Congress and other government officials.
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Treasury Said to Consider Sales of Stakes in Small U.S. Banks
The U.S. Treasury Department is considering selling stakes and allowing mergers involving banks in the Troubled Asset Relief Program, an Obama administration official said.
The Treasury is also weighing the restructuring of some of about 370 remaining TARP banks that received government bailouts during the financial crisis and allowing third-party investments, said the official, who declined to be identified because the information hasn’t been made public.
After lenders including Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. repaid taxpayer-funded bailouts, most firms left in TARP are small or regional banks. The largest include Regions Financial Corp. of Birmingham, Alabama; Zions Bancorporation of Salt Lake City; and M&T Bank Corp. of Buffalo, New York.
In November, the Treasury said it was working with investment firm Houlihan Lokey to explore options to help the government recuperate TARP money from banks.
Under TARP, the Treasury put cash into banks in exchange for equity stakes to help rescue financial institutions. The Treasury has estimated that it will profit by about $20 billion on the bank portion of TARP.
BofA Subpoenaed by Massachusetts Over Collateralized Loans
Bank of America Corp., the second-largest U.S. lender by assets, was told to turn over documents to Massachusetts’s top securities regulator related to the company’s involvement in collateralized loan obligations.
The inquiry focuses on two CLOs the Charlotte, North Carolina-based bank sold in 2007 that resulted in about $150 million in losses to investors, according to a statement Feb. 10 from the state’s secretary of the commonwealth, William Galvin.
Galvin said in the statement that the securities division is investigating whether the issuer knowingly over-valued the assets “to get them off their books” and onto those of investors.
Bill Halldin, a Bank of America spokesman, said the company would cooperate fully with the probe and can’t comment further on regulatory inquiries.
Separately, Bank of America and four of the other biggest mortgage servicers agreed Feb. 9 to a $25 billion settlement of state and federal probes into shoddy foreclosure practices.
For more, see Interviews section, below.
China solicits opinions on bank charge regulations, Xinhua Says
The China Banking Regulatory Commission, with the central bank and a reform commission, has invited the public to comment on proposed regulations limiting the amount Chinese commercial banks can charge for services, Xinhua reported.
The draft regulations, which were issued Feb. 10, were compiled jointly by the regulatory commission, the People’s Bank of China and the National Development and Reform Commission, according to an online statement of the People’s Bank of China, Xinhua said.
The purpose of the regulations is to “protect financial consumers’ legitimate rights and promote healthy development of bank services,” the central bank said in the statement, according to Xinhua.
The comment period will be open until March 20, the news service reported.
Deutsche Bank Said to Settle Kirch Suits for About $1 Billion
Deutsche Bank AG and the heirs of media entrepreneur Leo Kirch are close to settling a 10-year-old dispute for about 800 million euros ($1 billion), according to a person with direct knowledge of the negotiations.
The settlement will end lawsuits over whether comments made in 2002 by former Deutsche Bank Chief Executive Officer Rolf Breuer caused the collapse of Kirch’s media group, according to the person, who declined to be identified because the settlement hasn’t been made public. The bank last year rejected a settlement for 775 million euros proposed by a Munich court.
Kirch, who died in July, pursued lawsuits against Breuer and Deutsche Bank seeking at least 3.3 billion euros. The lawsuits, which continued after Kirch’s death, claim his media group failed because Breuer questioned its creditworthiness in a 2002 Bloomberg TV interview.
Deutsche Bank spokesman Christian Streckert declined to comment. A spokesman for Kirch also declined to comment.
Bild Zeitung reported the settlement earlier today.
MF Global U.K. Administrators Made First Distributions Feb. 10
Administrators of MF Global ’s U.K. unit confirmed they made the first interim distribution to cover client-money claims on Feb. 10. The first payments relate to claims by as many as 600 clients seeking $12 million, according to administrators at KPMG.
A second wave of settlements, starting next week, will affect another 1,300 clients with estimated claims of $19 million, KPMG LLP said in a statement on its website.
KPMG LLP was appointed by the court in the U.K. to wind up the broker’s U.K. unit.
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Whitman Capital Founder Indicted on Insider-Trading Charges
The founder of Whitman Capital LLC was charged with taking part in two separate insider-trading conspiracies, allegedly using illegal tips on Google Inc., Polycom Inc. and Marvell Technology Group Ltd. to make more than $900,000 for the hedge fund.
Doug Whitman traded on information he got from two sources, including one who has admitted to sharing tips with Galleon Group LLC co-founder Raj Rajaratnam, according to an indictment filed Feb. 10 in Manhattan federal court. The U.S. Securities and Exchange Commission also sued Whitman, 54, and his Menlo Park, California-based hedge-fund firm for insider trading.
Whitman is charged with two counts of conspiracy to commit securities fraud and two counts of securities fraud. If convicted, he faces as long as five years in prison on each conspiracy charge and 20 years on each securities fraud charge. Whitman, who lives in Atherton, California, pleaded not guilty in Manhattan federal court and was released on $1.5 million bond.
The allegations against Whitman intersect with a series of cases brought in a five-year insider-trading probe by the Federal Bureau of Investigation and the U.S. Attorney’s Office in New York against fund managers including Rajaratnam, as well as insiders at technology companies and so-called expert-networking firms.
The criminal case is U.S. v. Whitman, 12-cr-00125; the related civil case is Securities and Exchange Commission v. Whitman, 12-cv-01055, U.S. District Court, Southern District of New York (Manhattan).
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Brown, Rosner Comment on Banks’ Mortgage Settlement With U.S.
Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talked about the $25 billion settlement between the U.S. and the five biggest mortgage servicers to end a probe of abusive foreclosure practices. He spoke with Betty Liu and Dominic Chu on Bloomberg Television’s “In the Loop.”
For the Brown video, click here.
Joshua Rosner, an analyst at Graham Fisher & Co., also talked about the settlement. He said we don’t know how much of the settlement will end up “being born by the banks themselves,” as opposed to investors. He thinks ultimately the settlement will not hurt the banks.
For the Rosner video, click here.
Cridland Says U.K. Bankers Must Be Rewarded for Success
John Cridland, director general of the Confederation of British Industry, talked about U.K. banker bonuses and top executive pay. He touched on the importance of transparency and linking compensation to performance.
He spoke with Bloomberg’s Scott Hamilton in London.
For the video, click here.
Comings and Goings
Ex-EU Official David Wright Named as Secretary General of IOSCO
David Wright, a former financial services official at the European Commission, will become manager of the international organization that coordinates securities regulators.
Wright is scheduled to start in March as the secretary general of the International Organization of Securities Commissions, the Madrid-based group said in an e-mailed statement. IOSCO, a member organization of the Financial Stability Board, brings together market regulators from over 100 countries to coordinate rule-making and share information.
Wright, a U.K. national, left the commission, where he held the post of deputy director general for internal market and services, in 2010.