Bank Firewalls, Citigroup ‘Defects,’ D.E. Shaw: Compliance

The European Commission published the members and remit of a group of experts that will examine whether banks should build internal firewalls to protect taxpayers and customers when failure of one part of a lender threatens to cascade throughout the company.

The group, to be headed by European Central Bank council member Erkki Liikanen, will “determine whether, in addition to ongoing regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection,” the Brussels-based commission said yesterday in an e-mailed statement.

Measures to be considered by the group include “prohibiting banks from carrying out some activities or requiring banks to put certain activities (e.g. taking deposits from retail customers) into separate legal entities,” according to the statement.

Lenders including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp., have criticized plans by U.S. regulators to ban commercial banks from proprietary trading, saying the draft measures would increase risk, raise costs for investors and be vulnerable to legal challenge.

Michel Barnier, the European Union’s financial services chief, has said the initiative, known as the Volcker rule, will be among those examined by Liikanen’s high-level group.

The group will report “by the end of summer 2012,” the commission said.

The group’s members include European Aeronautic, Defence & Space Co. Chief Executive Louis Gallois and Alessandro Profumo, former chief executive officer of UniCredit SpA, Italy’s biggest bank.

Compliance Policy

CFTC Poised to Re-Propose Dodd-Frank Block Trade Regulation

The U.S. Commodity Futures Trading Commission is poised to re-propose Dodd-Frank Act regulations that would determine when swaps are big enough that their price and size don’t need to be reported immediately to the public.

CFTC commissioners may vote at a meeting in Washington today to seek comment on a revised measure after JPMorgan Chase & Co., Goldman Sachs Group Inc. and financial-industry trade associations said the original proposal could hamper liquidity and didn’t account for different types of swaps. Banks told the CFTC they need time to hedge or lay off risk related to so-called block trades before they are reported.

The CFTC measure would divide interest-rate, credit and other types of swaps into categories and then determine thresholds for large trades. The threshold would be set at the 67th percentile for notional value of swaps in a category, resulting in 6 percent of interest-rate and 7 percent of credit swaps being considered block trades based on current market data, according to a CFTC official who spoke on condition of anonymity at a briefing for reporters yesterday.

Determination of a minimum block trade size is “among the most important elements” of Dodd-Frank’s derivatives rules, Jeremy Barnum, a JPMorgan managing director, and Don Thompson, an associate general counsel for the Wall Street bank, said in a Jan. 12, 2011, letter to the CFTC and the SEC.

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Greenlight Re Seeks Europe Deals as Insurers Need Capital Relief

Greenlight Capital Re Ltd., the reinsurer that counts hedge fund manager David Einhorn as its chairman, said regulatory changes and Europe’s debt crisis will probably create opportunities to sell more coverage.

The reinsurer was created in 2004 to assume risk from primary carriers and provide Einhorn with more funds to invest. Europe’s financial firms have been forced to bolster their finances as declines in sovereign debt holdings erode capital. Regulators on the continent are preparing to implement Solvency II, a set of rules designed to strengthen reserves to protect policyholders against a decline in investment markets.

The reinsurer created a Dublin-based business in 2010 to pursue opportunities in Europe and focuses on markets where “capacity and alternatives are limited,” Einhorn’s firm said yesterday in a regulatory filing.

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Compliance Action

D.E. Shaw to Pay $140,000 to Resolve CFTC Position-Limit Claims

D.E. Shaw & Co. will pay $140,000 to resolve U.S. Commodity Futures Trading Commission claims that the New York-based firm exceeded speculative position limits in soybean and corn futures contracts traded on the Chicago Mercantile Exchange.

D.E. Shaw held a short position of 9,894 May 2010 soybean futures contracts on April 1, 2010, which exceeded the single-month position limit of 6,500 contracts, the CFTC said in an order released yesterday. On June 18, 2010, D.E. Shaw held a short position of 13,657 December 2010 corn futures contracts, which exceeded the 13,500 single-month limit.

D.E. Shaw reduced the size of its futures positions on or before the next trading day and before being told of the violation, according to the order.

David Millar, an outside spokesman for D.E. Shaw at RLM Finsbury in New York, declined to comment on the order.

D.E. Shaw & Co. LP is part of the D.E. Shaw group, which had $23 billion in investment capital on Jan. 1 and was founded by David Shaw, according to the firm’s website.

The speculation limits cap is intended to prevent any single trading company from gaining too much influence on a derivatives market. The CFTC, the main U.S. derivatives regulator, completed Dodd-Frank Act regulations in October that will impose additional limits on exchange-traded futures as well as private swap contracts.

EON Calls on U.K. Power Generators to Boost Prompt Trading

EON AG’s U.K. business called on the nation’s other power generators to boost trading in a daily auction of next-day power held by Nasdaq OMX Group Inc. and Nord Pool Spot AS’s N2EX exchange.

The request came after Ofgem, the energy regulator, said yesterday it may force the nation’s six biggest utilities to sell 25 percent of their generated electricity in monthly auctions of contracts for as far as three years in advance.

EON, Iberdrola SA, SSE Plc, Electricite de France SA, Centrica Plc and RWE AG, collectively known as the “big six,” supply 99 percent of the nation’s power and gas. That makes it harder for smaller companies such as Intergen NV, Drax Group Plc, First Utility Ltd. and Ovo Energy Ltd. to compete in the market. EON, Iberdrola and SSE have committed to increasing power sales in the day-ahead market through N2EX.

That exchange is preparing to start a new futures contract based on the implied profit margin from generating power with natural gas, known as the spark spread, to help spur trading in the country’s electricity market.

South Africa to Begin First Sukuk Bond Sale, Managing ‘Risk’

South Africa plans to raise $500 million in sale of its first Islamic-finance bonds, or sukuk, in the next fiscal year as it seeks to diversify its sources of funding, the National Treasury said.

Sukuk bonds are governed by Islamic laws, which don’t allow for interest charges.

The Treasury has short-listed banks to arrange the sukuk sale, Monale Ratsoma, an official in the Treasury’s asset and liability management division, said in an interview. Lenders will be invited to present detailed proposals in March, he said, declining to name them.

Ratsoma said the sukuk bond sale “is about diversifying our sources of funding and managing risk.”

The sukuk bonds will form part of the $3 billion the Treasury plans to raise in international markets over the next three years, Ratsoma said.


Citigroup ‘Defrauded’ Fannie, Freddie, Whistle-Blower Claims

Citigroup Inc., which last week admitted breaking Federal Housing Administration rules and paid a fine, also violated regulations for home loans sold to Fannie Mae and Freddie Mac, according to a whistle-blower’s complaint.

The bank “defrauded, falsified information or misled federal government entities” by selling or securing insurance for mortgages with defects such as improper appraisals and paperwork errors and not reporting them as required, Sherry Hunt, a Citigroup quality-assurance vice president, said in her complaint, which was unsealed yesterday. It was filed under the False Claims Act in federal court in Manhattan in August.

For Citigroup, the third-largest U.S. bank by assets, the high defect rates could be costly. It might be forced to buy back substandard mortgages sold to government-controlled Fannie Mae and Freddie Mac, who buy or guarantee most U.S. mortgages.

Under the Feb. 15 settlement with the U.S. on FHA loans, Citigroup will pay $158.3 million. The Justice Department reserved the right to pursue criminal and other charges related to mortgages originated or underwritten by Citigroup and not insured by the FHA.

Hunt cited an “overall systemic failure” in her complaint that she said in a May 2011 letter to the Securities and Exchange Commission “threatens the thin ice the entire market is treading on.” The letter was also released yesterday.

“We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as strong as possible,” Sean Kevelighan, a Citigroup spokesman, said in an e-mailed statement.

Andrew Wilson, a spokesman for Washington-based Fannie Mae, and Chad Wandler, a spokesman for McLean, Virginia-based Freddie Mac, declined to comment.

The case is U.S. ex rel Hunt v. Citigroup Inc., 11-cv-005473, U.S. District Court, Southern District of New York (Manhattan).

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SEC Seeks Testimony of Former IKB Employee in Tourre Suit

The U.S. Securities and Exchange Commission wants to question a former employee of IKB Deutsche Industriebank AG in its lawsuit against Goldman Sachs Group Inc. trader Fabrice Tourre, court records show.

The SEC yesterday asked a federal judge in New York to issue the legal papers necessary for the agency to take testimony from Jorg Zimmerman, a resident of Germany.

The agency sued Tourre in 2010, saying he defrauded investors by not disclosing that hedge fund Paulson & Co. helped pick the underlying securities for a collateralized debt obligation, known as Abacus, and planned to bet against them.

After reaching a $550 million settlement with New York-based Goldman Sachs, the SEC filed a new claim against Tourre, saying he gave the company “substantial assistance” as it misled investors. The SEC said IKB wouldn’t have invested if it had known of Paulson’s involvement in the portfolio selection.

The agency said its lawyers want to ask Zimmerman about IKB’s decision to invest, the representations Tourre and Goldman Sachs made to the bank, “and the importance of the facts omitted by Tourre” and Goldman Sachs.

Zimmerman isn’t a defendant in the case. Tourre has denied wrongdoing in the lawsuit.

Pamela Rogers Chepiga, a lawyer for Tourre, didn’t immediately return a call seeking comment on the filing.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

Hong Kong Market Watchdog Wins Tiger Asia Appeal on Power to Sue

Hong Kong’s securities watchdog won the right to independently seek civil remedies from suspected rule breakers, reversing an earlier court decision that struck out its case against hedge fund Tiger Asia Management LLC.

Court of Appeal Judge Robert Tang wrote in a ruling handed down today that such a power “provides much needed ammunition to the commission to protect investors.”

The Securities and Futures Commission has been fighting for the ability to sue for relief before asking the Financial Secretary to bring a civil market misconduct inquiry. Criminal prosecution remains a challenge in a market where almost half of equities trading turnover comes from overseas investors, according to the most recent Hong Kong stock exchange data.

The SFC alleges that New York-based Tiger Asia traded on inside information from bankers arranging placements of China Construction Bank Corp. and Bank of China Ltd. shares in 2008 and 2009, pocketing HK$38.5 million ($4.9 million).

Simon Clarke, a lawyer for Tiger Asia employee William Tomita, said the defendants plan to appeal the case once more to Hong Kong’s highest court.

The case is Securities and Futures Commission and Tiger Asia Management LLC, Sung Kook Hwang Bill, Raymond Park, William Tomita, CACV178/2011 in the Hong Kong Court of Appeal.


SEC’s Schapiro Says Money Funds’ Makeup Makes Them Run-Prone

Money market fund regulations need to be revamped quickly to fix the funds’ inherent vulnerability to runs, said U.S. Securities and Exchange Commission Chairman Mary Schapiro.

“I do feel a sense of urgency about the structural weaknesses that exist in money market funds,” Schapiro said yesterday at a Washington breakfast with reporters sponsored by the Christian Science Monitor. The SEC has been working on two possibilities to change aspects of the $2.6 trillion money funds industry that make them “prone to runs,” she said, with the agency considering either a departure from the traditional $1 share price or mandating capital cushions.

Regulators have debated how to make the funds more stable since the 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run by clients that helped freeze global credit markets. The agency enacted changes two years later in an attempt to prevent runs, including new liquidity requirements, shorter maturity limits and enhanced disclosure mandates.

Schapiro said in a November speech that the agency would soon propose revamping fund rules. The commission hasn’t yet voted on a proposal.

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Michael Dooley Says Leverage Needs Enforcement

Michael Dooley of the University of California at Santa Cruz, said efforts to “limit leverage” by banks and financial institutions need enforcement.

Dooley talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” They were joined by David Kotok of Cumberland Advisors.

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Herzog Says Israel Competition Laws to Pass Before July

Zach Herzog, head of international sales at Psagot Investment House Ltd., discusses the Israeli government’s proposed recommendations to increase competition.

He talks from Tel Aviv with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

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Stretch Says Obama Corporate-Tax Proposal a ‘Framework’

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, talks about the Obama administration’s corporate-tax proposals.

The White House proposed reducing the corporate tax rate to 28 percent from 35 percent, eliminating tax breaks and changing some core provisions in the tax code. Stretch speaks with Erik Schatzker and Michael McKee on Bloomberg Television’s “InsideTrack.”

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Comings and Goings

Former SEC Commissioner Casey Working for Atkins’ Firm Patomak

Kathleen L. Casey, a former member of the U.S. Securities and Exchange Commission, has gone to work at a Washington consulting firm run by another former Republican commissioner, Paul S. Atkins .

Casey, a Republican who left office when her term expired last year, will be a senior adviser at Patomak Global Partners LLC.

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