The U.S. Securities and Exchange Commission will oversee hundreds more private advisers at hedge funds and private equity firms than it first predicted, expanding the reach of one of the most controversial requirements of the Dodd-Frank Act.
The managers of such investment funds face a deadline today to register with the SEC. The agency expects to receive about 1,300 registration applications, according to SEC spokeswoman Judith Burns. That is about a 70 percent increase from the 750 advisers the agency said as recently as July that it expected to register. Burns didn’t explain why the number is higher than the agency estimated earlier.
The 2010 financial regulatory overhaul included the registration provision for hedge fund and private equity advisers so the SEC could have a better understanding of what had been an opaque corner of finance. The surge in registrations reflects the gaps in the SEC’s knowledge of the sector, said Cornelius Hurley, the director of the Morin Center for Banking and Financial Law at Boston University.
The SEC hasn’t hired new staff to specifically focus on reviewing the registration applications, though the office that conducts examinations has made 60 additional hires during the past 18 months.
The SEC completed the registration rule in June. Greenlight Capital Inc., BlackRock Capital Management Inc. and Paulson & Co. Inc. are among the hedge funds that are already registered with the SEC.
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EU Regulators May Win Powers to Ban Proposed Securities
European Union regulators may win powers to ban new financial instruments before they are sold, as part of an overhaul of the region’s market rules.
Such “precautionary” bans would be justified if a security “gives rise to significant investor protection concerns or poses a serious threat to the orderly functioning and integrity of financial markets,” according to a report by Markus Ferber, the lawmaker leading work on the measures in the European Parliament.
Ferber is seeking to bolster last year’s EU plans to revamp the region’s market legislation, known as Mifid. He is also backing calls from other lawmakers in the parliament for high-frequency traders to face punitive fees when they create market volatility by placing excessive numbers of canceled orders.
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Danish FSA Says Stricter Bank Writedown Rules Effective April 1
Denmark’s Financial Supervisory Authority said stricter standards for booking impairments will become effective from April 1, meaning banks in the Nordic country will need to take account of the changes in their first-half reports.
“The central pillar of the new rules is that loans to troubled property clients in the future need to be written down to the value of the property,” the Copenhagen-based FSA said in an e-mailed statement yesterday. “The same applies to loans, in which particularly risky business methods are applied,” such as transactions in which distressed loans are transferred, the regulator said.
Volcker Rule May Raise Fuel Costs, Cut Fuel Output, IHS Says
The Volcker rule will raise U.S. electricity costs and cut oil and natural gas output by crimping the ability of energy companies to hedge their risks, IHS Inc. said yesterday in a bank-funded report.
Investment in natural gas production would fall by $7.5 billion a year as companies, unable to manage their price risks, curtail spending on exploration, according to the report from a team of analysts. Refineries may close, fuel prices rise, and 182,000 jobs could be lost.
The rule, named for ex-Federal Reserve Chairman Paul Volcker, seeks to prevent deposit-taking firms from making bets with their own capital and limits their investment in hedge funds. Rules proposed in October may curb market-making and constrain the ability of banks to provide commodity firms with risk management and intermediation services, IHS said.
The report was commissioned by New York-based Morgan Stanley, which, according to the Office of the Comptroller of the Currency, is the third-largest derivatives dealer among U.S. banks.
U.S. banks including JPMorgan Chase & Co. and Morgan Stanley have been pressing regulators to scale back the draft of the proprietary trading rule issued in October.
FSB Publishes Results of Consultation on Systemic Banks
The Financial Stability Board published responses to draft rules on data to be reported by systemically important banks.
The responses were received after the FSB published Oct. 6 the consultative document “on a Common Template for Global Systemically Important Banks” and set Nov. 6 as a deadline for comments. The organization received 28 responses, including comments from “national and international banking associations, FSB said in a statement.
FSB will bring associations together for a workshop on May 12 to discuss the topic of systemically important banks, it said in the statement.
Brevan Howard Asked RBS to Change Libor, Fired Banker Says
Brevan Howard Asset Management LLP, a $33 billion hedge fund, asked Royal Bank of Scotland Plc to change the London interbank offered rate five years ago, according to a trader suing the lender for wrongful dismissal.
‘‘Brevan Howard telephoned on 20 Aug. 2007 to ask the defendant to change the Libor rate,’’ Tan Chi Min, a trader fired by the bank for allegedly trying to manipulate the rate, said in court papers filed March 23 with the Singapore High Court. The bank ‘‘received this request without objection,’’ according to the document. The hedge fund isn’t a party in the suit and isn’t being sued for wrongdoing.
Scott Nygaard, listed as head of short-term markets finance on an RBS website, knew about the call from Brevan Howard, Tan said in his filing. No further facts or particulars supporting Tan’s allegation were given in the court papers.
Regulators around the globe are probing whether banks colluded to manipulate rates including Libor, the basis for $360 trillion of securities worldwide. RBS has ‘‘substantial and credible” defenses to claims it tried to rig interest rates, the Edinburgh-based bank said in its annual report March 9.
Suresh Nair, an attorney at Straits Law Practice LLC in Singapore who represents Tan, declined to elaborate further on the fired trader’s claims about Brevan Howard. Nygaard, who remains an RBS employee, declined to comment. Patricia Choo, a Singapore-based RBS spokeswoman, as well as officials at London-based Brevan Howard declined to comment on the case.
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Commerzbank to Set Up Bad Bank in Move to Wind Down Eurohypo
Commerzbank AG, Germany’s second-largest bank, will wind down its Eurohypo unit and refrain from acquisitions for two years to meet revised European Commission conditions following its bailout during the credit crisis.
Commerzbank, based in Frankfurt, will transfer all of Eurohypo’s public finance business and most of its commercial-property unit to a new entity called Non-Core Assets, which will be wound down over time, the lender said today. Only a portion of the commercial real-estate financing in Germany, the U.K., France and Poland capped at 25 billion euros ($33 billion), including a maximum of 5 billion euros of annual new business, will gradually be transferred to Commerzbank.
The lender will have to cut its balance sheet to 600 billion euros by the end of this year and hold off on making acquisitions until the end of March 2014 under terms of the new deal. The commission had previously instructed Commerzbank to sell Eurohypo, which proved difficult in the midst of the European sovereign-debt crisis.
Investment Banks May Face U.K. FSA Enforcement on Bribery Rules
The U.K. finance regulator found that almost half of the investment banks it recently visited didn’t adequately assess the risk of employees paying bribes and most hadn’t taken account of its anti-corruption rules.
The firms, which included eight global investment banks and seven smaller firms, were visited by the Financial Services Authority starting in August last year and scrutinized on how well prepared they were to prevent employees from paying bribes, the regulator said in a report yesterday. The FSA found that some of the firms “still had significant work to do” to update their compliance procedures. It didn’t name the firms.
Only two of the banks had started or carried out internal audits on corruption controls, the regulator said. After conducting the review, the agency is considering whether to ask some of the investment banks to improve their bribery systems and controls or fine them.
In the U.K., a new bribery law took effect in July which is one of the strictest in the world. Under the law, companies must prove they have adequate controls to prevent corruption in order to defend themselves if a bribe is paid on their behalf anywhere in the world, even if company officials didn’t know.
SEC Said to Review Credit Suisse Exchange-Traded Note
U.S. Securities and Exchange Commission investigators are reviewing a Credit Suisse Group AG exchange-traded note that became unhinged from its benchmark and whipsawed investors, a person familiar with the matter said.
The VelocityShares Daily 2x VIX Short-Term ETN, which seeks to provide twice the daily return of the VIX volatility index, climbed almost 90 percent above its asset value after the Zurich-based bank stopped issuing shares in February. The value of the note, which had risen to almost $700 million from about $163 million at the end of 2011, plunged last week when Credit Suisse said it would begin creating shares again.
The review by the SEC’s enforcement division comes amid heightened scrutiny of exchange-traded funds and notes, which had about $1.2 trillion in assets at the end of February, according to the ETF Industry Association. The European Commission said March 22 that it is examining potential “conflicts of interest” affecting the securities.
The price swings in the VelocityShares ETN highlight the risk posed by disruptions in supply and demand of the notes. Because the notes are normally pegged to underlying assets such as stocks, bonds and indexes, sponsors can create or redeem shares to offset price distortions caused when investors buy and sell them.
SEC spokesman John Nester declined to comment, as did Credit Suisse spokeswoman Sofia Rehman in London. The person who confirmed the probe was under way asked not to be identified because the inquiry isn’t public.
Special Section: Copenhagen Meeting
BOE’s Tucker, ECB’s Praet Participate in Copenhagen Conference
Bank of England Deputy Governor Paul Tucker said minimum financial-stability standards in Europe may not be enough to prevent future crises and regulators need to have the power to toughen rules in some cases.
Tucker made the remarks in an article written for a conference European finance ministers in Copenhagen yesterday. “Those who frame the micro regulatory rules are not clairvoyant. Sometimes supervisors will for example need tougher requirements for a while to head off exuberance that threatens to tip over, once a bubble bursts, into instability,” he said in the prepared remarks.
Tucker also said that because of the inevitability of local credit booms, the euro area needs a “regime of macroprudential policy at the level of national authorities.”
Separately at the Copenhagen conference, European Central Bank Executive Board member Peter Praet said euro-area finance ministers should quickly approve the combining of the region’s two bailout funds, the European Stability Mechanism and the European Financial Stability Facility, in order to expand emergency resources.
Praet made the statement in an article prepared for a seminar yesterday.
Euro-area finance chiefs will probably decide at a meeting in Copenhagen today to run the 500 billion-euro ($666 billion) permanent ESM alongside the temporary EFSF, increasing the size of the firewall, a European official told reporters in Brussels March 28. The funds are designed to aid member states locked out of financial markets because of concerns about their debts, helping to stem contagion.
Praet said the debt crisis “is not over” and the responsibility for resolving it “lies with the euro-area governments, not with the central bank.”
Barnier Seeks June Publication of Bank Crisis Resolution Plans
Michel Barnier, the European Union’s financial services chief, said that he will seek to present proposals on winding down failed banks by the time of a summit of Group of 20 nations in June.
The plans will include writing down a failing lender’s creditors and shareholders, Barnier told reporters in Copenhagen today. Writing down a bank’s creditors “must be an option” for regulators, Barnier said.
Separately, Barnier said he will today publish a consultation document on plans for winding down failing banks. The European Commission will seek views on the measures, which include writing down a failing lender’s creditors, for the next few weeks, he said.
Euro Finance Chiefs to Discuss Mersch ECB Candidacy
Euro-area finance ministers will discuss candidates including Luxembourg’s Yves Mersch for a vacancy on the European Central Bank’s Executive Board during a meeting in Copenhagen today, though a decision may not be reached, Slovak Finance Minister Peter Kazimir told reporters. For more, click here.
Europe to Cap Rescue Lending at 800 Billion Euros, Fekter Says
Euro-area governments agreed to cap overall rescue lending at 800 billion euros ($1.1 trillion), rejecting calls for even bigger defenses against the debt crisis, Austrian Finance Minister Maria Fekter said.
About 300 billion euros in already pledged loans will go along with 500 billion euros in the planned permanent rescue fund to build the backstop, Fekter said. Funds remaining in the temporary rescue fund would be used only to get the permanent fund up to its target, she said.
William Isaac Says MF Global Wasn’t Well Regulated
William Isaac, chairman of Fifth Third Bancorp and a former chairman of the Federal Deposit Insurance Corp., talked about the investigation into MF Global Holdings Ltd.’s bankruptcy.
Isaac, who spoke with Betty Liu on Bloomberg Television’s “In the Loop,” also discussed the outlook for U.S. banks.
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Bachus Says ‘Legal Cloud of Legitimacy’ Hangs Over CFPB
House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, said President Barack Obama’s use of the recess appointment to install Richard Cordray as the first head of the Consumer Financial Protection Bureau “casts a legal cloud of legitimacy” over the agency.
Bachus delivered the opening statement of the committee’s hearing to receive the semi-annual report of CFPB. Cordray said “reasonable rules” can have a “positive influence on financial innovation,” according to his prepared opening remarks.
The report explains the consolidation in the CFPB of consumer protection tasks that had been spread among federal agencies. It also discusses the agency’s mandate, under the Dodd-Frank Act, “to reduce outdated, unnecessary or unduly burdensome regulations.”
Levitt Says Goldman Board Selection a Correct Move
Former Securities and Exchange Commission Chairman Arthur Levitt said Goldman Sachs Group Inc.’s appointment of a senior independent director is “a step in the right direction.” Levitt is an adviser to Goldman Sachs and a member of the board of Bloomberg LP, the parent of Bloomberg Radio.
He talked with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”
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