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RBC ‘Wash Trades,’ Basel Roll Call, Election: Compliance

Royal Bank of Canada was sued by U.S. regulators over claims that the Toronto-based lender engaged in illegal futures trades worth hundreds of millions of dollars to garner tax benefits tied to equities.

Canada’s biggest bank made false and misleading statements about “wash trades” from 2007 to 2010 in which affiliates traded among themselves in a way that undermined competition and price discovery on the OneChicago LLC exchange, the Commodity Futures Trading Commission said April 2 in a complaint filed in Manhattan federal court.

CFTC enforcement director David Meister said in an e-mailed statement that Royal Bank not only executed a wash sale scheme, it also “went a step further” when it “misled the exchange into believing that its conduct was lawful.”

“We certainly reject the allegations as unwarranted,” Royal Bank Chief Executive Officer Gordon Nixon said yesterday in a conference call. “This is not a financially material event to RBC, but we certainly take the situation seriously and we intend to vigorously defend our reputation.”

The bank intends to defend against the allegations, Kevin Foster, a Royal Bank spokesman, said yesterday in an e-mailed statement.

“Before we made a single trade, we proactively contacted the exchange to seek its guidance,” Foster said. “These trades were fully documented, transparent, and reviewed by both the CFTC and the exchanges, and for the next several years were monitored by them.”

The trading was permissible under the CFTC’s published guidance, Foster said in the statement, which also described the lawsuit as “not a financially material event to RBC.”

Royal Bank enlisted affiliates to help carry out hundreds of futures transactions that were done off-exchange and then reported to OneChicago as block trades between independent affiliates, according to the CFTC. A single group of RBC employees designed and managed the strategy, the agency said.

Chris Grams, a CME spokesman, declined to comment.

The CFTC is seeking monetary penalties and an injunction against further violations, the agency said.

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Compliance Policy

India Said to Plan Easing Tax Rules for Foreign Banks to Expand

India will amend tax laws by June to encourage foreign lenders to expand in Asia’s third-largest economy, said two government officials with direct knowledge of the matter.

Prime Minister Manmohan Singh’s administration will change the capital gains and stamp duty laws to ease the tax burden on foreign lenders that convert their branch operations into local subsidiaries, said the officials, declining to be identified citing government policy. Overseas banks had balked at the levies they would have to pay for setting up local units.

India’s central bank, seeking to expand services to 600,000 villages, has recommended that overseas lenders should set up local subsidiaries if their branches’ assets exceed 0.25 percent of total banking assets. A unit in India will also give the Reserve Bank more control, according to a discussion paper posted on the regulator’s website.

The changes in the law will be included in the finance bill that Finance Minister Pranab Mukherjee presented in Parliament on March 16, the officials said.

D. S. Malik, a spokesman for the finance ministry in New Delhi, didn’t return two calls to his office.

Canada Bank Regulator to Boost Supervision of Mortgage Insurers

Canada’s banking regulator said it plans to boost oversight of mortgage insurers in the next three years as part of efforts to monitor emerging risks that may have an impact on federally regulated financial institutions.

The Ottawa-based Office of the Superintendent of Financial Institutions, in a “planning and priorities” document released on its website, said it will also produce a report for the finance minister on “certain matters” related to Canada’s mortgage insurance guarantee framework.

The regulator also said it will work to identify “emerging macroeconomic and financial-sector risks” in several areas, including residential mortgage portfolios.

Compliance Action

German Cartel Office Probes Oil Companies Over Price Complaints

Exxon Mobil Corp., BP Plc, ConocoPhillips, Royal Dutch Shell Plc and Total SA are being investigated by Germany’s Federal Cartel Office over pricing practices following complaints from independent gas stations.

The probe was opened yesterday after complaints from gas-station operators that the companies sold fuel to their independent competitors at higher prices than what they charge at their own filling stations, the agency said today in a statement. Other complaints claim the companies have sold fuel at their stations below cost, the regulator said.

“We are not selling below cost,” Gabriele Radke, a spokeswoman for Exxon Mobil’s Esso gas-station brand, said by phone from Hamburg today.

The cartel office yesterday asked Total to provide information about pricing practices at one of its German filling stations near Baden-Baden, said Burkhard Reuss, a company spokesman.

“There have been several of these requests in the past years,” Reuss said by phone from Berlin. “We have always provided the information and we will do so again. So far, there has never been a follow-up from the office that anti-competitive practices indeed took place.”

Representatives for Shell, ConocoPhillips’s Jet brand and BP’s Aral brand didn’t immediately respond to calls and e-mails seeking comment.

China Speeds Opening as QFII Quota Increased to $80 Billion

China accelerated the opening of its capital markets by more than doubling the amount foreigners can invest in stocks, bonds and bank deposits as the government shifts its growth model to domestic consumption from exports.

The China Securities Regulatory Commission increased the quotas for qualified foreign institutional investors to $80 billion from $30 billion, according to a statement on its website yesterday. Offshore investors will also be allowed to pump an extra 50 billion yuan ($7.95 billion) of local currency into the country, up from 20 billion yuan.

China, the world’s second-biggest economy, has pledged this year to free up control of the yuan and liberalize interest rates as the government deepens reforms to revive growth and offset slowing exports and a cooling housing market.

The regulator had granted a total of $24.6 billion in quotas to 129 overseas companies since the program first started in 2003 through the end of March. About 75 percent of assets were invested in Chinese stocks, with the rest in bonds and deposits, according to the statement.

The CSRC accelerated the program last month, granting a record $2.1 billion of quotas to 15 companies. It was more than the $1.9 billion in 2011 as a whole.

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CFTC Bars White House Election Derivatives as Gambling Contracts

U.S. regulators barred a Chicago exchange from allowing trades in derivatives tied to the outcome of the 2012 U.S. elections, deciding that the transactions would constitute gambling and undermine the public interest.

The North American Derivatives Exchange sought to offer contracts tied to the outcome of the elections and whether Democrats or Republicans would control the U.S. House, Senate and White House. The U.S. Commodity Futures Trading Commission, which regulates futures contracts tied to wheat, oil, natural gas and other commodities, said yesterday that it ordered the exchange not to list election contracts for clearing or trading.

“We felt strongly that these products met all legal and regulatory criteria for listing, and that the public would benefit from having these products traded on a well-regulated exchange,” Tim McDermott, general counsel at Nadex, said in an e-mailed statement.

The company said the contracts would have allowed traders to take an economic position on the election’s consequences for tax policy and other issues. The company said existing political events contracts, allowed by the CFTC to trade on the Iowa Electronic Market, an academic project of the University of Iowa, have offered accurate predictions of election outcomes.

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U.S. Alongside China in Roll Call of Basel Bank-Rule Laggards

The U.S. and China are among eight nations lagging behind in their implementation of international bank-capital rules, according to a report by the Basel Committee on Banking Supervision.

The group also called yesterday for regulators to “keep up their efforts” to ensure that they meet a January 2013 deadline to adopt further requirements, known as Basel III.

Global regulators have agreed on two overhauls of bank capital and liquidity rules since the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008.

A first set of changes, known as Basel 2.5, boosted the reserves that lenders must hold against assets they intend to trade. Published in 2009, the requirements were scheduled to take effect globally at the end of 2011.

Six of the committee’s 27 members: Argentina, Indonesia, Mexico, Russia, Turkey and the U.S., haven’t implemented any of the Basel 2.5 rules, the group said. Two other nations, China and Saudi Arabia, have made limited progress, the group said in a report published on its website.

A more extensive upgrade of the Basel rules, known as Basel III, was published in December 2010. The measures are supposed to be adopted by nations by January 2013, and to fully apply from 2019.

So far only two nations, Japan and Saudi Arabia, have published their final implementing laws for Basel III, the group said.

The Basel committee also published plans yesterday for more in-depth probes of how well nations apply its rules. A first set of investigations, covering the EU, U.S. and Japan, has already begun, the group said.

SEC’s Examination Unit Meets U.S. Bank Leaders on Risk, FT Says

The U.S. Securities and Exchange Commission has been holding meetings about risk management with directors at companies including Goldman Sachs Group Inc., Barclays Plc, Wells Fargo & Co., Morgan Stanley and Wedbush Securities Inc., the Financial Times reported, citing unidentified people familiar with the matter.

A key lesson of the financial crisis is the need for more critical assessment of risk management by boards, senior management and regulators, the newspaper cited Carlo di Florio, who heads the SEC’s examination division, as saying. Di Florio didn’t identify banks the SEC has met, the FT said.

Irish May Reach Anglo Irish Note Solution Before Vote, RTE Says

Ireland may be able to reach a long-term solution on re-engineering promissory notes used to bail out the former Anglo Irish Bank Corp. before a referendum on the European Fiscal compact in May, RTE reported, without saying where it obtained the information.

An agreement on the deal may be reached as early as the meeting of euro-area finance ministers scheduled for May 14, RTE reported.

The European Financial Stability Facility is the preferred option to replace promissory notes. Finance Minister Michael Noonan said March 29 he didn’t expect a deal on the restructuring until later this year. He said bonds from the EFSF may be part of a solution, RTE said.


Court Approves SEC Settlement for Jiau, BNA Says

Winifred Jiau, who was convicted of insider trading in connection with last year’s expert-networking trials, agreed on March 24 with the U.S. Securities and Exchange Commission, BNA reported.

The agreement was announced by the SEC March 27.

U.S. District Judge Jed Rakoff in Manhattan approved the settlement, under which Jiau agreed to be barred from future securities law violations. Rakoff also sentenced Jiau to two years of supervised release and ordered her to forfeit more than $3 million.

The SEC didn’t seek disgorgement or a civil penalty from Jiau in light of the criminal sanctions against her and because it recovered illicit trading profits from Jiau’s tippees, according to a statement by the SEC on its website.

Jiau, a consultant to expert-networking firm Primary Global Research LLC, was arrested in late 2010 on charges she sold several hedge funds confidential information about publicly traded companies for insider trading purposes. Jiau was found guilty June 20 on the criminal charges and was sentenced to four years in prison.

The case is U.S. Securities and Exchange Commission v. Longoria, 11-cv-0753, Southern District of New York(Manhattan).

MF Global U.K. Staff Seek $62 Million in Unpaid Bonus, Severance

Employees of MF Global Holdings Ltd.’s U.K. unit are seeking 39 million pounds ($62 million) of unpaid bonuses, severance pay and pension contributions from the collapsed broker’s administrator KPMG LLP.

The service company that employed staff in London has one of the largest claims on a list of creditors published by KPMG on March 14. The 39 million pounds is for the unit to meet its remaining contractual obligations to workers, including guaranteed bonuses and statutory redundancy pay, KPMG administrator Richard Heis said.

Former employees trying to recover money from KPMG may only get a few pence on each pound they claim because most of the debts owed to employees are unsecured, said employment lawyer Jo Keddie of London firm Winckworth Sherwood LLP. Those seeking bonuses or other payouts are being treated as unsecured creditors, and will be paid only after KPMG has returned MF Global’s customers all their money.

Executives including Jon Corzine, the former New Jersey governor and Goldman Sachs Group Inc. executive who led MF Global, don’t know whether they’ll be able to access $375 million in insurance proceeds to defend themselves against 21 lawsuits related to the firm’s collapse. U.S. Bankruptcy Judge Martin Glenn in Manhattan delayed ruling on the request earlier this week.

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SNCB, Infrabel Sue Elevator Makers on Cartel Ruling, L’Echo Says

Belgian rail companies SNCB Holding SA and Infrabel SA are suing four of the world’s largest elevator manufacturers, L’Echo reported, citing a court filing.

The rail firms opened legal proceedings in a Belgian court on the basis of a European Union antitrust decision against United Technologies Corp.’s Otis unit, Finland’s Kone Oyj, Schindler Holding AG and ThyssenKrupp AG, the newspaper said. The companies were among five that were fined a total of 992.3 million euros ($1.3 billion) by the European Commission in 2007 for participating in a cartel that carved up the market for elevators and escalators.


ANZ Bank’s Chronican Says Capital, Funding Costs Hurt Investors

Australia’s tighter capital rules and more expensive wholesale funding will drive up the cost of banking, said Phil Chronican, who heads Australia & New Zealand Banking Group Ltd.’s operations in the country.

“As a result, shareholder returns are going to be lower,” he said in an e-mailed copy of a speech given today in Melbourne. “The leverage effect alone will make it much harder for any bank to achieve the returns -- in some cases over 20 percent --that were common in the pre-2007 environment.”

ANZ Bank, Australia’s third-largest, is facing a slowdown in domestic economic growth and low mortgage demand, prompting a plan to cut about 1,000 jobs. The wane in borrowing comes amid global pressure on banks to hold more capital to avoid risks and the rising cost of borrowing overseas, where Australia banks get about 20 percent of funding.

Chronican said the global financial crisis is creating a “new landscape” where banks will need to “aggressively” manage costs and find new avenues of growth as banks operate in a “fundamentally different environment.”

The Australian Prudential Regulation Authority, the country’s banking regulator, last month rejected calls from lenders to amend the way it plans to locally administer proposed global capital rules.

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