EU Bank Funding, Spain’s Banks, Cybersecurity: Compliance

European Union lawmakers are considering rules to protect bank depositors that may stymie two of the main funding sources for the region’s lenders.

The proposals risk limiting how much banks can raise from covered bond sales and European Central Bank loans by placing curbs on the assets they can use for security. The aim is to boost protection for account holders and other creditors.

Sharon Bowles, chairwoman of the European Parliament’s Economic and Monetary Affairs Committee, said she’s among legislators pushing for banks to increase disclosure of the assets earmarked for collateral in covered bonds and repurchase agreements. Banks may also have to set aside reserves when secured funding exceeds a set limit.

Tying up assets in collateralized fundraisings is known as encumbrance and pushes unsecured creditors further back in the queue for payment in a default. Any move to limit secured debt issuance risks hurting banks that have relied on record covered bond sales and the 1 trillion euros ($1.3 trillion) of loans that the ECB has pumped into the system since December.

Bernd Volk, head of covered bond research at Deutsche Bank AG said there is a risk that banks relying on secured debt could face funding pressures as unsecured funding may be too expensive or not even accessible.

The amendments are under debate by EU lawmakers before a vote on the text April 25. Finance ministers from the region’s 27 nations will then seek to reach agreement on the draft at a May 2 meeting. The draft law must be approved by parliament and national governments before it can come into effect.

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Compliance Policy

Corporate Treasurers Object to SEC Money Fund Plan, Survey Finds

A majority of U.S. corporate treasurers would decrease or discontinue their use of money-market mutual funds if the Securities and Exchange Commission follows through with plans to reform rules governing the $2.6 trillion industry.

Seventy-nine percent of treasurers said they would pull at least some money from the funds if the SEC forces them to abandon their traditional $1 share price, according to a survey conducted by consulting group Treasury Strategies and paid for by the Investment Company Institute, a fund industry trade group in Washington.

Should the SEC restrict redemptions, 90 percent would withdraw money, while 36 percent would pull out money if the SEC institutes capital buffers that would force firms to hold a certain amount of cash as reserves against losses.

Regulators and asset managers have been debating steps to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. In 2010 the SEC introduced liquidity minimums, average maturity limits and new disclosure requirements. SEC Chairman Mary Schapiro has since said additional steps are necessary to strengthen the funds.

The SEC is working on two proposals. The first would strip money funds of their traditional fixed $1 share price, substituting a floating value. The second would impose capital requirements and restrict redemptions.

Four of the agency’s five commissioners, a majority of whom must approve any new rule, are evenly split over the plans.

Fund executives and the ICI have argued that the SEC’s plans would destroy the appeal of money funds for investors and have lobbied against the reforms.

Compliance Action

Fed Gives Banks Until July 2014 to Comply With Volcker Rule

Wall Street banks will have two years to implement the so-called Volcker rule so long as they make a “good faith” effort to comply with the ban on proprietary trading, U.S. regulators said.

Banks will get the “full two-year period” provided by the Dodd-Frank financial overhaul law to “conform” their activities and investments, the Federal Reserve and four other U.S. agencies said in a statement yesterday. The Fed has the authority to extend the period of compliance beyond July 21, 2014, the regulators said.

The rule, named for its original champion, former Fed Chairman Paul Volcker, is one of the most contentious parts of the Dodd-Frank law that was drafted to help prevent another financial crisis. It’s intended to reduce the chances that banks will put depositors’ money at risk. Banks argue that it is so broad and poorly defined it will force them to leave business lines and could actually increase risks for their clients.

Regulators had signaled that they probably would provide banks more clarity because they wouldn’t finish the rule before the July 21, 2012, implementation deadline.

Yesterday’s statement isn’t “an all-clear” because regulators also said the banks need to make plans to comply, said Karen Shaw Petrou , a managing partner at Federal Financial Analytics, a Washington research firm whose clients have included Wells Fargo & Co.

Lawmakers and regulators have considered taking action on the timeline for the Volcker rule at the request of the banking industry, which raised concerns about how to comply with the statute.

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SEC Said to Authorize Proceeding Against Egan-Jones Ratings

The U.S. Securities and Exchange Commission voted to bring an enforcement action against Egan-Jones Ratings Co. and its founder, Sean Egan, a person familiar with the matter said.

The SEC yesterday authorized an administrative proceeding after investigators alleged Haverford, Pennsylvania-based Egan-Jones overstated its experience in evaluating asset-backed and government securities in its 2008 application to become a nationally recognized statistical ratings organization, or NRSRO, said the person, who declined to be identified because the matter isn’t public.

Egan-Jones is one of nine firms registered with the SEC as an NRSRO, which means companies can use their credit ratings for regulatory purposes. Egan-Jones is paid by investors. The biggest NRSROs, McGraw-Hill Cos.’ Standard & Poor’s and Moody’s Corp., are paid by debt issuers.

In its 2008 application, Egan-Jones said it had about 150 credit ratings on asset-backed securities, the company said in a November brief to the SEC obtained by Bloomberg News. After talking to regulators, Egan-Jones changed its methodology and cut that figure in 2009 to 13. Similarly, it originally reported 50 government ratings and reduced that to nine, according to the document. The company said it will fight the allegations.

“The SEC’s action has nothing to do with the quality, integrity or excellence of any rating EJR has ever issued,” the company said in a statement yesterday. “Rather the SEC’s claims relate to a four-year-old application process.”

Florence Harmon, an SEC spokeswoman, declined to comment on the matter.

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Spain Doesn’t Need to Seek Bank Aid From Bailout Funds, EU Says

The European Union said Spain doesn’t need to seek help to recapitalize its banks and there are no plans for Spain to tap rescue funds.

Spain isn’t now in position to use the European Financial Stability Facility or its permanent successor, the European Stability Mechanism, EU spokesman Olivier Bailly told reporters in Brussels yesterday.

The euro area has assembled an 800-billion euro ($1 trillion) firewall to combat the sovereign debt crisis, a combination of 500 billion euros in fresh money and 300 billion euros that already have been committed. European leaders have expanded the toolkit available to the rescue fund, including new powers to support primary-market bond sales and to recapitalize banks through their governments.

Bailly said the bank-aid program can’t be used unless several conditions are in place. Countries can’t request such assistance unless banks are unable to raise capital in financial markets and if the public funds are unavailable to support the institutions, he said.

Spain yesterday sold 2.54 billion euros of bonds, just above the maximum target for the auction, and its borrowing costs rose. Bonds declined after the sale.

The ECB lent more than 1 trillion euros to the region’s banks in December and February, leaving lenders flush with cash and underpinning demand for government bonds.

Deutsche Bank Denies It’s Considering Share Sale for Capital

Deutsche Bank AG, Germany’s biggest bank, denied it’s considering selling shares to raise capital after a newspaper reported it was weighing such a plan.

The company can meet planned capital rules from the Basel Committee on Banking Supervision, known as Basel III, without resorting to such a measure, Armin Niedermeier, a spokesman, said yesterday by telephone, citing comments made by Frankfurt-based Deutsche Bank’s management this year.

Deutsche Bank has been criticized by analysts for being under-capitalized.

The lender is considering selling as much as 3 billion euros ($3.9 billion) in shares, the Wall Street Journal reported yesterday, citing unidentified people with knowledge of the matter.

Deutsche Bank will be able to meet Basel III requirements for next year, Chief Financial Officer Stefan Krause told analysts on a Feb. 2 conference call, according to a Bloomberg transcript.

Employees’ Internal Fraud Reports Rise on Bounty Program

The whistle-blower bounty program of the U.S. Securities and Exchange Commission may indirectly be fueling a resurgence in corporate internal mechanisms, BNA reported.

Internal reports of fraud incidents by employees jumped to an “all-time high” in the fourth quarter of 2011, according to the Quarterly Corporate Fraud Index. Reports of fraud comprised 21.6 percent of all internally reported compliance issues.

The Index, compiled by the Network Inc. and BDO Consulting, was published March 29.

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Italian Finance Police Seize 20% Stake in Listed Company

Italy’s Finance Police are seizing a 20 percent stake in a “large” publicly traded company in Milan amid a probe into market manipulation, according to an e-mailed statement yesterday.

The police didn’t identify the company.

Ansa newswire reported that Finance Police in Milan had seized 20 percent of Premafin Finanziara SpA shares. A spokeswoman for the Milan-based holding company declined to comment on the report when contacted by Bloomberg News.

SEC Said to Vote to Bring Proceeding Against Egan-Jones Ratings

The U.S. Securities and Exchange Commission voted to bring an administrative proceeding against Egan-Jones Ratings Co., a person familiar with the matter said.

The agency voted yesterday to bring the administrative action against Egan-Jones and its founder, Sean Egan, according to the person, who declined to be identified because the matter hasn’t been made public.

“The material that we put down was accurate to the best of our ability,” Sean Egan, president of the Haverford, Pennsylvania-based company, said in an interview on CNBC yesterday. “If we had to do it again today I’d say exactly the same thing.”

SEC spokeswoman Florence Harmon declined to comment on a vote.

Japan’s Ruling Party to Review Central Bank Law, Nikkei Says

The Democratic Party of Japan, the nation’s ruling party, will review the central bank law, the party’s policy chief Seiji Maehara said, the Nikkei newspaper reported.

Maehara, Finance Minister Jun Azumi, and Economic Minister Motohisa Furukawa are among those seeking more steps for the economy by the Bank of Japan, according to Nikkei.

The opposition Your Party proposed legislation last week. The Democratic Party of Japan’s financial affairs panel should consider the issue, Maehara said, according to Nikkei. Any legislation is unlikely to pass soon, given resistance within ruling and opposition parties, Nikkei reported.


SEC Says OptionsXpress Violated Registration Requirements

OptionsXpress Inc., its former chief financial officer and an affiliated dealer were accused by U.S. regulators of violating securities laws by skirting registration requirements in order to avoid an audit.

OX Trading LLC violated two regulatory requirements by trading through an OptionsXpress customer account after ending its membership with the Chicago Board Options Exchange and its SEC brokerage registration, the U.S. Securities and Exchange Commission said in an action filed yesterday in administrative court in Washington. The OptionsXpress affiliate was an unregistered dealer from October 2009 to November 2010 and traded without being a member of a national association or exchange beginning in March 2009, the SEC said.

After regulators questioned the firm’s registration status and said it should be audited, Thomas E. Stern, who was also OX Trading’s chief compliance officer as well as OptionsXpress CFO, responded by, among other actions, sending a letter containing factual inaccuracies and no legal opinion or analysis, the SEC said.

Stephen Senderowitz, an attorney for the firms, said OX Trading believed registration wasn’t required because it was acting as a proprietary trading firm and had no customers. He said in an e-mailed statement that “OptionsXpress is a separate entity, had nothing to do with OX Trading’s registration and does not belong in this case.” He added that OX Trading was recently closed in anticipation of the Volcker rule.

The SEC action is the agency’s second against Stern and OptionsXpress this week.

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Brown, Olcott, Sachs, Clinton on Cybersecurity Laws

Megan Brown, a partner at Wiley Rein LLP, Jacob Olcott, principal for cybersecurity at Good Harbor Consulting LLC, Marcus Sachs, vice president of government affairs at Verizon Communications Inc., and Larry Clinton, president and chief executive officer of Internet Security Alliance, participated in a discussion about cybersecurity laws and legislation.

Bloomberg’s Chris Strohm moderated the panel at the Bloomberg Link Cyber Security Conference in New York.

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Algorithmic Trading May Spur Volatility, Mispricing, Turner Says

The rise of algorithmic trading may cause markets to be more volatile and securities to be mispriced, Adair Turner, chairman of the U.K.’s Financial Services Authority, was expected to tell a U.S. audience yesterday.

Regulators should also question whether high-frequency trading “can possibly deliver significant positive social value” by pricing securities at intervals of nano-seconds, Turner will say, according to prepared remarks for a speech at Johns Hopkins University in Baltimore. “There must be at least some danger” the rise of computer-driven trading results in increased volatility, according to Turner.

High-frequency traders have come 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. A proposed European tax on financial transactions could cut high-frequency trading by as much as 90 percent “in some market segments,” Manfred Bergmann, a European Commission official, said last year.

It’s unclear what “positive social value high-frequency trading delivers, and if it delivers no value, but makes its individual traders richer, then some subtle and unnecessary rent extraction process is at work,” Turner said in the speech text provided by the FSA.

Comings and Goings

U.K. Serious Fraud Office Chief Walks Away From Agency in Flux

Richard Alderman, the director of the U.K.’s Serious Fraud Office, steps down today after a four-year term in which ambitious reforms to combat bribery were hampered by a dwindling budget and a depleted staff.

Alderman has championed a system of negotiating corruption settlements with companies rather than prosecutions since joining the SFO as director in 2008. He was criticized for taking on several high-profile investigations, including American International Group Inc.’s Financial Products unit and convicted swindler Bernard Madoff’s London operations, only to close them later citing a lack of evidence.

Alderman has defended his record at the SFO, saying the agency is “unrecognizable compared to what it was four years ago.” He’s improved morale and the public perception of the SFO even after severe cutbacks in its budget, he said.

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SEC Names Blizzard Associate Director for Regulatory Policy

The U.S. Securities and Exchange Commission picked Diane C. Blizzard as associate director for regulatory policy and investment adviser regulation in its Division of Investment Management.

Blizzard will supervise two offices that develop recommendations for rulemaking and other policies under the Investment Company Act and Investment Advisers Act. She replaces Robert Plaze, who was promoted to deputy director of the division. Previously, Blizzard was managing executive of Division of Investment Management staff.

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