Swaps-Dealer Defined, Commodity Options, Ads: Compliance

U.S. regulators yesterday defined which companies will face new oversight in the $708 trillion global swaps market, where largely unregulated trades helped fuel the 2008 financial crisis.

A rule approved on a 4-1 vote by the Commodity Futures Trading Commission will initially define a regulated dealer as one that conducts swaps with a notional value of at least $8 billion in a 12-month period. The Securities and Exchange Commission approved a similar rule by a unanimous vote. Republican Scott O’Malia was the CFTC’s lone dissenting vote.

Companies defined as swap dealers will ultimately be subject to the highest capital and collateral requirements for market participants.

The $8 billion threshold will fall to $3 billion within five years unless new market data persuade regulators to use a different level. While a lower threshold will capture more dealers, it still exceeds the $100 million level that was initially proposed.

CFTC Chairman Gary Gensler said he was confident the rule would impose new requirements on the dominant players in the swaps market even though the threshold is higher than initially proposed.

The SEC and CFTC met separately yesterday to weigh parallel versions of the rule. The rule was mandated by the Dodd-Frank Act of 2010 to govern clearing, trading, capital, collateral and internal compliance standards, as well as swap dealers’ relationships with clients including pension funds and cities. Dodd-Frank calls for most swaps to be guaranteed by central clearinghouses and traded on exchanges or other platforms.

A CFTC staff member who briefed reporters April 17 didn’t provide details on how many companies would be subject to the heightened oversight.

The rule also defines a smaller group of “major swap participants” that hold large positions in categories such as currency exchange rates or commodity swaps. One threshold for “substantial position” would be daily uncollateralized exposure of $1 billion in any major swaps category except for rate swaps, where $3 billion will be the mark.

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Compliance Policy

CFTC Votes to Treat Commodity Options the Same as Other Swaps

The U.S. Commodity Futures Trading Commission adopted rules yesterday that will treat commodity options the same as all other swaps.

In a 5-0 vote, the five-member commission removed regulations that for more than a decade have treated agricultural swaps and commodity options differently than other transactions in the swaps market. Those products will now be subject to the same rules as interest rate, credit and other types of swaps.

The rule takes effect 60 days after it is published in the Federal Register.

The CFTC and Securities and Exchange Commission are implementing rules for the swaps market after unregulated trades helped fuel the 2008 credit crisis.

Banks Urged by FSB to Probe Mortgage Insurance’s Impact on Risk

Banks should carry out “prudent and independent” assessments of the protection offered by mortgage insurance policies to avoid making irresponsible loans, the Financial Stability Board said yesterday in a statement on its website.

Mortgage insurance, which gives holders protection if they can’t make payments on their home loans, “should not be considered as an alternative” to due diligence by a bank into whether borrowers will be able to meet their obligations, the FSB said. Mortgage insurers should also be subject to oversight by regulators, it said.

The FSB, which brings together financial ministry officials, central bankers, and regulators from the Group of 20 nations, made the recommendation as part of a set of guidelines on responsible mortgage lending.

While national regulators are free to “consider imposing” limits on the size of mortgage a bank can offer in relation to the value of the property, such curbs may not be needed if banks follow “sufficiently prudent” lending policies, the FSB said.

Colleges Could Be Banned From Using U.S. Tax Money for Ads

U.S. colleges would be barred from spending federal taxpayer money on advertising, marketing and recruiting under a Senate bill targeting for-profit institutions.

The 15 largest for-profit colleges, including Apollo Group Inc.’s University of Phoenix, spent a combined $3.7 billion, or 23 percent of their fiscal 2009 budgets, on advertising, marketing and recruiting, according to a summary of the bill proposed yesterday by senate Democrats. Nonprofit colleges spend an average of half a percent of revenue on marketing, the lawmakers said.

Congress, the U.S. Justice Department and state attorneys general are scrutinizing the marketing practices of for-profit colleges, which have higher student-loan default rates than traditional institutions and can rely on federal financial aid for as much as 90 percent of their revenue.

For-profit colleges cater to working adults and other non-traditional students who can’t be reached through a high school guidance counselor, said Steve Gunderson, president of the Washington-based Association of Private Sector Colleges and Universities, which represents in the industry.

The bill “is clearly another attempt by some policy makers to try and put private-sector colleges and universities out of business,” Gunderson said in a statement. “It also reflects a fundamental misunderstanding of the students we serve and the public service we provide.”

The legislation is unlikely to pass this year because of the approaching presidential election season.

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Fannie Mae Fix By Treasury Said to Preserve U.S. Mortgage Role

U.S. Treasury officials are leaning toward recommending that Fannie Mae and Freddie Mac be replaced with a government safety net for the mortgage finance system and continued federal backing for loans to lower-income homebuyers, according to three people briefed on the discussions.

Treasury Secretary Timothy F. Geithner has said in recent public appearances that an agency recommendation for winding down the two taxpayer-owned mortgage companies could be released in coming weeks. It hasn’t yet been determined whether the plan, likely to be a broad outline rather than a detailed prescription for legislation, will be released that soon, the people said.

In timing its proposal, Treasury must balance political and economic realities. Presidential campaign politics and deep divisions between Democrats and Republicans in Congress make it unlikely that mortgage-finance reform will be enacted this year. At the same time, the lack of a clear blueprint is contributing to continued weakness in the housing market, said Karen Dynan, a former economist with the Federal Reserve Board of Governors.

The two companies, which veered toward bankruptcy when the housing market collapsed in 2008, were seized by regulators and have drawn almost $190 billion in taxpayer aid. The debate over the companies’ future has been complicated by their growing prominence in the housing market during the recession. That has prompted the real estate industry to lobby Congress to move slowly on reducing the government’s role.

Meanwhile, the Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, is proceeding with its own plans for shrinking their footprint, and recommends the enterprises share the risk on some of their portfolio through the use of private capital, mortgage insurance and other means.

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Compliance Action

U.K. FSA Seeks Faster Asset Return in Wake of MF Global Collapse

Hector Sants, the U.K.’s Financial Services Authority chief, said the agency would seek ways to ensure clients of failed investment firms get their assets back faster in the wake of the failure of MF Global Holdings Ltd.

Sants said made the statement in a letter Andrew Tyrie, a Conservative lawmaker, dated March 19. The letter is posted on the U.K. parliament’s website.

The FSA is working on rules to ensure “the information and records required by an insolvency practitioner to return a client’s assets is readily available” in the letter.

About $1 billion of MF Global’s U.K. client money remains locked away in other financial institutions after the brokerage’s collapse, administrators at KPMG LLP said last month. The figures relate to unsegregated client accounts, which MF Global mixed with its own funds and have been difficult for the administrators to recover.

SMBC Nikko May Be Excluded From Japan Air IPO Underwriters

Japan Airlines Co., the carrier planning an initial public offering this year, may exclude SMBC Nikko Securities Inc. as a lead underwriter for the sale after regulators said the brokerage breached domestic securities law.

“We are now carefully considering how to respond,” Ryu Shimizu, a spokesman for state-backed Enterprise Turnaround Initiative Corp., said when asked by telephone today if SMBC Nikko would be disqualified following a Securities and Exchange Surveillance Commission recommendation that the company be penalized. He declined to comment further.

ETIC, the fund holding about 97 percent of Japan Air’s voting rights after a government bailout, has said it can disqualify underwriters from the sale of Japan Air stock as a matter of policy. SMBC Nikko, a unit of Sumitomo Mitsui Financial Group Inc., was found to have illegally solicited investors to buy shares prior to the announcement of a client’s public offering in 2010, the SESC said on April 13.

Kiyoo Kuniyoshi, a Tokyo-based spokesman for SMBC Nikko, declined to comment. Taro Namba, a spokesman for Japan Airlines, deferred questions about the offering to ETIC.

The turnaround corporation, which must sell its stake in Japan Air by January 2013, is seeking an IPO for the airline, two people familiar with the matter said in January. The carrier, delisted from the Tokyo Stock Exchange in 2010, emerged from bankruptcy in March 2011.

Japanese regulators have increased scrutiny of trading surrounding public equity offerings.

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Moody’s Fired by Danish Banks as Investors Support Rebellion

Denmark’s biggest banks are firing Moody’s Investors Service as they win assurances from some of the country’s biggest investors that the opinions of ratings companies hold limited value.

Nykredit A/S, Denmark’s biggest mortgage lender and Europe’s largest issuer of covered bonds backed by home loans, terminated its contract with Moody’s on April 13, citing its “volatile” views. Danske Bank A/S’s mortgage unit Realkredit Danmark A/S, the country’s second-largest home-loan provider, dropped Moody’s in June. Jyske Bank A/S, Denmark’s second-biggest listed bank, is looking into ending its dealings with Moody’s, according to Steen Nygaard, its head of treasury, who said Moody’s “crossed the line for fairness.”

Moody’s in June criticized Denmark’s $470 billion mortgage-bond industry, the world’s third largest after the U.S. and Germany, for failing to curb refinancing risks fueled by a mismatch in funding and lending maturities. Since then, Nykredit’s benchmark index of Denmark’s most-traded mortgage bonds has risen 6.3 percent to a record, signaling investors are disregarding the warnings.

“Moody’s does not comment on its commercial relationships,” spokeswoman Jessica Sibado said in a phone interview yesterday. “Moody’s considers Denmark as having one of the strongest covered bond frameworks in Europe. However, since 2009, Danish covered bonds have been impacted by the weakening issuer credit strength” and “increasing refinancing risks,” she said.

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FSA Must Destroy E-Mails Used in Keydata Probe, Judge Rules

The Financial Services Authority must destroy privileged attorney-client e-mails it obtained during its investigation into collapsed investment firm Keydata Investment Services Ltd., a London judge said.

The privileged documents must be deleted or destroyed, and all references to them redacted, Judge Ian Burnett said yesterday. Keydata and its founder Stewart Ford won a ruling in October that the regulator shouldn’t have used the e-mails.

The judge refused requests by Ford’s lawyers to have the FSA’s 2010 warning notice thrown out, and for any investigator who had seen the protected e-mails to be removed from the agency’s probe.

The FSA had to suspend its four-year investigation into Keydata because of a judicial review into its conduct. Keydata administered 2.8 billion pounds ($4.49 billion) of assets when the FSA asked a court to place it into administration in 2009.

The regulator was examining whether Keydata targeted investors with potentially misleading advertisements, and potential tax irregularities.

Ford’s lawyer Harvey Knight said in an e-mailed statement that he is pleased the court recognized the client’s “right to legal privilege.” The decision not to quash the warning notice, or remove investigators who had seen the e-mails, may be appealed, he said.

FSA spokeswoman Cerris Tavinor said: “Our work in this area remains a priority for us particularly given the public interest in the Keydata matter.”

Tomra Loses EU Court Challenge to 24-Million-Euro Antitrust Fine

Tomra Systems ASA, a Norwegian maker of machines that collect cans and bottles for recycling, lost a court challenge to a 24-million-euro ($31.5 million) antitrust fine by European Union regulators for stifling competition.

The EU’s Court of Justice, in a binding decision, upheld the fine imposed by the European Commission in 2006.

Tomra’s practice of offering rebates and discounts to retailers restricted the market for competitors, the regulator said in 2006. Tomra argued the commission used “misleading” evidence in deciding to levy such a heavy fine in its appeals to the EU General Court in 2010 and again in this case before the Court of Justice.

The case is C-549/10 P Tomra Systems and Others v Commission.

Ex-Goldman Sachs Employee Spared Prison for Aiding Insider Probe

A former Goldman Sachs Group Inc. employee who said he gave away “thousands” of dollars he received from an insider-trading scheme to New York’s homeless was sentenced to probation instead of prison.

Gautham Shankar, 38, of New Canaan, Connecticut, who also worked as a trader at Schottenfeld Group LLC, was ordered yesterday by U.S. District Judge Richard Sullivan in New York to serve three years of probation, including the first six months confined to his home.

Shankar, who faced as long as 37 months in prison, collected less than $450,000 in the scheme, his lawyer said. The judge also fined Shankar $25,000 and directed him to forfeit $448,437. He was one of more than 20 people charged by the U.S. in overlapping insider trading cases involving Galleon Group LLC founder Raj Rajaratnam.

Shankar pleaded guilty to conspiracy and securities fraud in October 2009. He admitted that while working at Schottenfeld, he passed and profited from illegal tips he obtained from Zvi Goffer, a former Galleon Group employee, and Thomas Hardin, a former analyst at Lanexa Global Management LP.

Shankar assisted prosecutors for more than a year before the charges were filed, Assistant U.S. Attorney Andrew Fish told Sullivan yesterday.

Shankar declined to comment after court.

The case is U.S. v. Shankar, 09-cr-996, U.S. District Court, Southern District of New York (Manhattan).

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Gould Says JOBS Act to Lift Ban on Hedge Fund Ads

Jay Gould, a partner at Pillsbury Winthrop Shaw Pittman LLP, talked about the Jumpstart our Business Startups Act and the outlook for advertising by the hedge fund industry. The JOBS Act will lift a ban on advertising by hedge funds.

He spoke with Deirdre Bolton on Bloomberg Television’s “Money Moves.” Bloomberg’s Peter Cook also spoke.

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Tangent Capital’s Rice Discusses ‘JOBS’ Act

Bob Rice, managing partner at Tangent Capital Partners LLC, discusses the law formally known as the “Jump Start Our Business Startups” Act, and its impact on initial public offerings. Rice talks with Bloomberg’s Pimm Fox and Courtney Donohoe on Bloomberg Radio’s “Taking Stock.”

For the audio, click here.

Comings and Goings

U.K. SFO Chief Executive Quits as Director Prepares to Leave

Phillippa Williamson, the chief executive officer of the U.K. Serious Fraud Office, is resigning from the agency as Director Richard Alderman prepares to step down this week.

Alderman, 59, is leaving the SFO on April 20 after four years there. Williamson joined Alderman at the SFO in 2008 from the Revenue and Customs office, where they both previously worked. David Green, a barrister, will take over as the head of the SFO next week as it faces a dwindling budget and government in-fighting over the future of Britain’s economic crime prosecutors.

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