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Tax Treaty Blocked, EU Banks, Islamic Finance: Compliance

Senator Rand Paul is blocking an amendment to a U.S.-Swiss tax treaty, slowing Switzerland’s handover of data on thousands of Americans with bank accounts hidden from the U.S. Internal Revenue Service.

The protocol, negotiated in September 2009, would amend a 1996 treaty and make it more difficult for Switzerland to refuse requests from the IRS for tax information about U.S. customers of Swiss banks. The U.S. is cracking down on secret accounts held by its citizens at UBS AG, Credit Suisse AG, Wegelin & Co. and other financial institutions.

Paul, a Kentucky Republican, said the protocol is too “sweeping” and would threaten protections under the Fourth Amendment to the U.S. Constitution, which guards against unreasonable search and seizure. Paul said he is exercising his privilege to delay a Senate vote.

President Barack Obama sent the protocol to the Senate in January 2011, and the Foreign Relations Committee approved it July 26. Paul, a critic of the IRS who won his seat in 2010 with the backing of the Tea Party movement, could require Democrats who control the Senate to spend a week of floor time before voting to ratify the protocol, which requires assent by two-thirds of the senators. He said his office discussed changes with the Swiss ambassador.

Under the current treaty, the Swiss can grant a U.S. request seeking data on a taxpayer suspected of “tax fraud and the like,” which involves acts such as using false documents or third parties to disguise account ownership. The Swiss won’t hand over data if taxpayers are suspected of evasion, a view upheld April 5 by the Swiss Federal Administrative Court.

While Switzerland’s lawmakers approved amending the treaty, the country’s federal government won’t ratify the protocol until both countries agree on a solution that ends negotiations on the investigation of Swiss banks, Finance Minister Eveline Widmer-Schlumpf said before a vote in the Swiss parliament on March 5.

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Compliance Policy

Sweden Rebuffs EU in Fight for Tougher Bank Capital Rules

The European Union will fail to reach a deal this week on bank capital rules unless member countries get more freedom to impose tougher requirements, Swedish Finance Minister Anders Borg said.

Borg said in an interview with Bloomberg News that he is not willing to compromise on “core principles” in the negotiations.

EU nations have clashed over proposals by Michel Barnier, the region’s financial services chief, to fix banks’ core capital requirements at 7 percent of their risk-weighted assets, with limited exceptions for national regulators to set higher thresholds. The figure was proposed by Barnier in 2011 as part of a draft law to apply rules agreed on by the Basel Committee on Banking Supervision. Sweden wants to set a 10 percent buffer from 2013, and raise it to 12 percent two years later.

Sweden, the U.K. and Spain are among a group of countries warning the plans would unacceptably restrain national powers. Other governments, including France, Italy and Austria, have backed Barnier’s approach.

Separately, bank regulators in the European Union may win powers to impose capital surcharges of as much as 3 percent on lenders’ activities at home and abroad as part of a compromise plan for applying Basel rules.

Denmark, which holds the EU’s rotating presidency, made the proposal to resolve a clash over how much freedom national authorities should have to impose capital rules on their banks that exceed a minimum standard, a Danish presidency official told reporters in Brussels yesterday.

Governments will seek to narrow their differences on the draft law at a meeting tomorrow, with finance ministers scheduled to meet again on May 15.

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Bahrain’s Islamic Regulator AAOIFI Issues 7 Financial Standards

Bahrain’s Accounting & Auditing Organization for Islamic Financial Institutions issued seven Islamic standards for the industry, the regulator’s Secretary General Khaled Al Faqih said yesterday.

The guidelines will govern financial rights or the disposal of rights, bankruptcy and liquidity management, Al Faqih said at a news conference in the capital Manama. The agency also listed rules for capital and investments protection, investment agency contracts, profit calculations from investment instruments, and the right to terminate legal contracts due to fraud, he said.

AAOIFI, which has 200 members, sets accounting and auditing standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria, according to its website. It has issued 48 Shariah guidelines and regulators in countries including Malaysia, Saudi Arabia, Australia and South Africa base some of their rules on AAOIFI.

Municipal-Bond Regulator May Force Faster Trading Disclosure

The regulator of the $3.7 trillion U.S. municipal-bond market may require faster disclosure of information about trades.

The Municipal Securities Rulemaking Board, which writes regulations for the market, said yesterday it is considering whether to require prices to be reported as soon as possible, rather than within 15 minutes of trades as now done. It is also evaluating whether to eliminate a five-day lag in publicizing the size of trades greater than $1 million.

The delayed disclosure of large trades has been in place since near real-time prices were introduced to the municipal market seven years ago and has masked the scale of much trading. Transactions above $1 million added up to an average $10 billion a day last year, according to the board’s statistics, accounting for some three-quarters of all trades.

The municipal-bond regulators have been working to bring greater transparency to the market for state and local government securities, where the amount of information available has been less than in other markets.

The board said yesterday it plans to ask the public to comment on whether trades should be reported as “soon as practicable.”

NBAD Expects a ‘Solution’ on New U.A.E. Loan Rules, CEO Says

National Bank of Abu Dhabi PJSC is in talks with the central bank about rules that limit lending to the government and its companies and expects a “solution,” said Chief Executive Officer Michael Tomalin.

U.A.E. banks can lend no more than 100 percent of their capital to local governments and the same to government-related entities, the central bank said April 4. There was no limit under previous rules. National Bank of Abu Dhabi’s exposure to sovereign and quasi-sovereign clients is 199 percent of its regulatory capital, according to estimates by Deutsche Bank AG.

The bank, the United Arab Emirates second-biggest bank by assets, forecast lending to increase by about 10 percent this year and its interest and fee income to rise by between 5 percent and 10 percent, Tomalin said. Loan growth is not likely to be affected by the new rules, he said.

The lender expects its ratio of non-performing loans to performing loans to peak at between 3.5 percent and 3.75 percent from 3.03 percent in March, Tomalin said.

JPMorgan’s Zubrow Says Fed Risk Rule May Destabilize Markets

JPMorgan Chase & Co. said a Federal Reserve proposal to cut risk by capping a bank’s dealings with any one lender, corporation or foreign government fails to strike the “correct balance” and may harm financial markets.

The plan “could destabilize markets,” Barry Zubrow, executive vice president of corporate and regulatory affairs for JPMorgan, said April 29 in a comment letter to the central bank. The Fed is reaching “well beyond” the Dodd-Frank reform legislation with “disruptive” standards that duplicate or conflict with other rules and directives, he wrote.

Lenders including New York-based JPMorgan, the largest and most profitable U.S. bank, are resisting Fed efforts to impose tougher standards on too-big-to-fail firms whose collapse could hurt the broader economy. Fed Governor Daniel Tarullo will meet today with chief executive officers of the biggest banks including JPMorgan’s Jamie Dimon to discuss the limits and complaints about this year’s stress tests.

The proposal to limit credit exposure is designed to contain the damage if a large company, foreign government or bank should fail and threaten to take down other institutions with it. Under the rule, a firm deemed systemically important couldn’t have more than 10 percent of its counterparty risk tied to one entity. The 2010 Dodd-Frank Act proposed a 25 percent cap while giving the Fed authority to tighten the standard to ensure stability in financial markets.

The limit would apply to banks considered systemically important and counterparties when each has more than $500 billion in total assets, and would count loans, derivatives and other forms of credit.

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Cordray Divides Banks With Ability-to-Repay Loan Rule: Mortgages

Richard Cordray, the director of the Consumer Financial Protection Bureau is taking steps to discourage lenders from making home loans with risky features and outlining steps they must take to verify borrowers’ finances before lending to them.

The policy is part of the “qualified mortgage” or QM regulation. Banks that follow the guidelines will gain legal protection against borrower defaults.

The rule, which may be released as soon as next month, is dividing the banking industry with the largest mortgage firms such as Wells Fargo & Co. and Bank of America Corp. siding with some consumer groups that the provision should allow certain lawsuits. Trade groups whose members include smaller lenders are holding out for a version that would protect bankers entirely from being sued, arguing that without the provision, home loans will be costlier and harder to obtain.

The big banks consented to a weaker standard of legal protection in exchange for a broad definition of the types of permissible mortgages in the new rule, according to a March 7 letter to Cordray from the Clearing House Association, which represents the largest lenders. This step would “combine prudent lending with less litigation, benefiting homeowners, investors and lenders alike,” according to the letter.

To obtain legal protection, a lender would have to meet underwriting standards such as verifying a borrower’s income and assets. Qualifying loans also couldn’t have features such as interest-only payments or include fees and points totaling more than 3 percent of the loan amount.

Cordray has called the regulation, required by the 2010 Dodd-Frank Act “one of our most important rulemakings.”

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Compliance Action

FSB Enhances Its Process for Monitoring Compensation Practices

The Financial Stability Board said it established a group of experts from different jurisdictions to monitor different countries implementation of the regulator’s compensation practices.

The, group, known as the Compensation Monitoring Contact Group, is a network of experts with regulatory or supervisory responsibility on compensation practices within their own jurisdictions, according to a statement by the FSB on its website.

Regulation to Push Swap Spreads Wider, Greenwich Associates Says

Most companies that use interest-rate derivatives expect tougher capital rules to push spreads on the contracts wider, increasing their costs to hedge, according to a study by Greenwich Associates.

Basel Committee on Banking Supervision rules known as Basel 2.5 and Basel III have led to higher credit charges on swaps for bank customers, increasing trading costs, the Stamford, Connecticut-based consulting firm said yesterday. “The impact will be felt even more widely when the new Basel capital requirements are implemented by all derivatives dealers, which is expected to happen before 2019,” the firm said in the report.

While most derivatives users say they’re willing to absorb the impact of wider spreads without reducing trading, a “large share” of those surveyed said that having to post collateral would cause them to reduce hedging or cut back their activity in interest-rate derivatives, according to the report.

About $1.3 trillion in interest-rate derivatives were traded last year, little changed from 2010, according to the report.

Fed Said to Criticize Banks for Risk Models Used in Stress Tests

The Federal Reserve criticized how some of the 19 largest U.S. banks calculated potential losses and planned dividends in this year’s stress tests, people with knowledge of the process said.

The critiques will be part of feedback letters sent to the lenders this week that cover everything from data collection to risk measurement, said three of the people, who declined to be identified because communications with the Fed are private. Flaws included marking down all housing prices at the same rate, rather than matching them to specific regions, and planning dividends that could drain needed capital.

The letters arrive as tensions mount between the largest banks and the Fed over how new rules to make the financial system safer will be carried out. Bankers have complained the stress tests completed in March lack transparency and underestimate their underwriting abilities, resulting in higher losses on some asset classes than the lenders projected.

“We strongly urge the Federal Reserve to provide detailed explanations of methodologies, models, techniques and underlying assumptions,” five banking trade groups led by the Clearing House Association said in an April 27 letter to the Fed. “It is simply unfair to ask a bank to pass a test -- and manage toward the standards of that test -- if the parameters are largely unknown.”

The Fed critiques are the most detailed feedback the banks have received on their 2012 stress-test submissions. The central bank developed the stress tests during the depths of the financial crisis. Regulators have said they want banks to manage their capital to limit the risk of future taxpayer bailouts.

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Mexico Antitrust Agency Votes on America Movil Fine

Mexico’s antitrust agency made a decision yesterday on whether to overturn, reduce or uphold a $1 billion fine against America Movil SAB, Mexico’s largest phone carrier.

The agency won’t disclose the vote until the parties have been notified, a requirement under Mexican law, it said yesterday in an e-mailed statement.

America Movil, which is controlled by billionaire Carlos Slim, earlier offered to cut fees to rivals and provide customers calls to other networks for no additional charge to convince the agency to overturn the fine.

The company said yesterday in a filing that it proposed the concessions in March during the antitrust agency’s review of the fine. The penalty was assessed a year ago for monopolistic practices in the market for fees charged to rivals.

If the agency upholds the penalty, America Movil expects to seek an injunction, it said in the filing to the U.S. Securities and Exchange Commission. It’s “not probable” that the company will end up having to pay the fine, it said.


Fidelity’s Stairs Traded on Inside Information, Hong Kong Finds

Former Fidelity Management & Research Co. portfolio manager George Stairs traded shares of Chaoda Modern Agriculture Holdings Ltd. on inside information of a share placement, a Hong Kong tribunal found.

Chaoda Chairman Kwok Ho and Chief Financial Officer Andy Chan, who were also specified in the civil inquiry, didn’t break insider trading laws when they divulged the Chinese vegetable producer’s plans to issue shares on investor calls, according to the 135-page ruling by Hong Kong’s Market Misconduct Tribunal.

The three-member tribunal, led by High Court Judge Michael Lunn, held hearings in February and March to investigate whether material non-public information was improperly disclosed on phone calls involving Kwok, Chan and U.S. institutional investors in 2009. Stairs took part in one of those calls and sold some of his Chaoda holdings before the placement, according to Hong Kong’s government.

Vincent Loporchio, a Boston-based spokesman for Fidelity, wrote in an e-mail yesterday that the company is reviewing the tribunal’s conclusions, and said the panel didn’t “indicate any criticism of Fidelity’s policies and procedures.”

The company said in February that it had concluded after an internal review that their employees hadn’t violated any laws or regulations. Stairs told the tribunal he believed the share-placement information was already public.

Kwok and Chan didn’t commit insider trading when they “deliberately and knowingly ignored the proper protocols for providing information” to Stairs, according to the tribunal.

BlackRock employees who also participated in conference calls with Kwok and Chan in June 2009 reported the information to their compliance department “immediately” and were restricted from trading, the tribunal heard.

Comings and Goings

SEC Names New York Chief Canellos Deputy Enforcement Director

George Canellos, head of the U.S. Securities and Exchange Commission’s New York regional office, has been named deputy director of the agency’s enforcement division, the agency said in a statement yesterday.

Canellos, 47, will take over the job vacated by Lorin Reisner, who left the SEC in January to become a top federal prosecutor in New York, the agency said. Canellos joined the agency in 2009, overseeing about 400 staff, including investigators, accountants and examiners responsible for policing more than 4,000 investment banks, advisers, brokers and hedge funds.

He will take over as deputy enforcement director on June 4, and Andrew Calamari, senior associate regional director, will become acting head of the New York office, the SEC said.

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