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CFTC Votes, Asset Encumbrance, Finra-ETF Fines: Compliance

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The Commodity Futures Trading Commission said yesterday that it will clarify indemnification and confidentiality provisions in the Dodd-Frank Act.

The proposed interpretation generally exempts foreign regulators from the two provisions and ensures foreign regulators will have access to data in Swap Data Repositories, or SDRs.

The exemption only applies to data that is required to be reported and if the SDR is recognized by the country’s law and regulations, according to a CFTC statement. The commission said it passed the proposal in a 5-0 vote.

The CFTC will seek public comment on the proposed interpretation, it said in the statement. The comment period will be open for 30 days from the date of publication in the Federal Register.

Compliance Policy

Bank Encumbrance Limit to Face Europe Opposition, Fitch Says

European governments may be unwilling to impose a limit on so-called asset encumbrance as part of any future bank rescue legislation because of the potential damage to the covered bond market, according to Fitch Ratings.

The main casualties would be specialist covered bond issuers in France, Germany and Scandinavia as well as banks in southern Europe that have become dependent on central bank financing, Fitch said. High levels of encumbrance may also be due to the way a nation’s finance industry is structured, rather than a sign of stress, according to Fitch.

Banks that encumber their balance sheets by tying up assets as collateral for securities such as covered bonds or in repurchase agreements, or repos, with central banks, have fewer available to meet claims if an institution fails. The International Monetary Fund in a report last week suggested that lenders should be required to hold a minimum quantity of unsecured debt that could be swapped into equity, or bailed in, to avoid a disorderly default.

While Scandinavian and German banks are “among the biggest issuers” of covered bonds, the portion of their balance sheets pledged as collateral isn’t rising and in some cases is even falling, Fitch said.

EU Bank Capital Agreement Sought in Clash Over Basel Rules

European Union finance ministers are seeking to overcome a clash on how governments can force lenders to set aside capital above the minimum required by international accords.

Nations are divided over proposals by Michel Barnier, the EU’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. Barnier proposed the limit in 2011 as part of a draft law to apply rules agreed on by the Basel Committee on Banking Supervision.

The U.K., Spain and Sweden are among countries warning that Barnier’s plan would restrain national regulators. Others, including France, Italy and Austria, have backed the commissioner’s approach. EU finance chiefs meeting in Brussels today are also debating how to assign risk and define safety buffers when evaluating bank balance sheets. If they can’t reach an agreement, they’ll return to the issue at their next scheduled meeting on May 15.

German Finance Minister Wolfgang Schaeuble said as he entered today’s meeting that he doubts the group will reach an agreement today. While the conflicts are “not so great,” the details are complicated, he said.

For more, click here.

Offshore CLOs Should Be Exempt From IRS Tax Claims, LSTA Says

An industry group is calling on regulators to exempt existing collateralized loan obligations from foreign tax reporting requirements, saying the rules might lead to a “market disruption” for hundreds of billions of dollars of assets in the market.

Offshore CLOs may be hit with a 30 percent withholding tax because of their inability to meet requirements under the Foreign Account Tax Compliance Act of 2010, the Loan Syndications and Trading Association said yesterday in a statement.

CLOs, a type of collateralized debt obligation that pool loans and slice them into securities of varying risk and return, help finance mergers and acquisitions and corporate growth strategies.

FATCA requires foreign banks and other financial entities to provide information about their U.S. customers to the Internal Revenue Service so the government can collect taxes. Under the regulation, CLOs maybe be subject to a 30 percent tax withholding on loan interest, principal payments or sale proceeds.

The measures regulators have taken to address the LSTA’s concerns, including an exemption for loans and portions of CLO debt issued before Jan. 1, 2013, fall short, according to yesterday’s statement.

Saudi Arabia May Set Up Housing Bank, Al Sharq Reports

Saudi Arabia may establish a bank to provide finance for housing, Al Sharq reported, citing Adnan Ghosheh, the executive director of national housing strategy at the Housing Ministry.

The Real Estate Development Fund has received 2.3 million applications for loans, the newspaper said, citing Mohammed al-Abadani, the fund’s director.

Compliance Action

Finra Fines Wells Fargo, Three Other Firms Over ETF Sales

Citigroup Inc., Morgan Stanley, UBS AG and Wells Fargo & Co. agreed to pay a combined $9.1 million to settle regulatory claims they failed to adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009.

The firms also didn’t have a reasonable basis for recommending the securities to their clients, the Financial Industry Regulatory Authority said yesterday in a statement. They will pay fines of about $7.3 million and reimburse $1.8 million to customers.

Finra warned brokers in June 2009 that leveraged and inverse ETFs were difficult to understand and not a good fit for long-term investors. ETFs typically mimic indexes and trade throughout the day like stocks. Leveraged versions use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark.

Wells Fargo, based in San Francisco, was assessed the highest fine at $2.1 million and must pay $641,489 in restitution. Citigroup, based in New York, received a $2 million fine and must pay $146,431 in restitution; New York-based Morgan Stanley will pay a $1.75 million fine and $604,584 in restitution; and Zurich-based UBS will pay a $1.5 million fine and $431,488 in restitution.

In settling the claims, the firms neither admitted nor denied the charges, said Washington-based Finra, the brokerage industry’s self-funded regulator.

“UBS is pleased to have resolved this FINRA matter,” spokeswoman Karina Byrne said in an e-mailed statement. “More than two years ago, UBS developed and implemented enhanced training, suitability and supervisory policies and procedures regarding leveraged, inverse, and inverse-leveraged ETFs.”

“Morgan Stanley strives for high standards of supervision and is pleased to settle this matter, which pertains to investments sold three to four years ago,” spokesman James Wiggins said in an e-mailed statement. “Since 2009, we substantially limited our sale of these specific types of investments and enhanced our tools to supervise them.”

“We are pleased to have this matter resolved,” Citigroup spokeswoman Liz Fogarty said in an e-mailed statement. A representative for Wells Fargo couldn’t immediately be reached.

Bank Errors Cited in Fannie Mae Principal-Reduction Test Failure

Wells Fargo & Co. employees ruined a pilot program to test principal reductions on mortgages guaranteed by Fannie Mae because they failed to correctly input data into a computer system, the Federal Housing Finance Agency said in a letter released yesterday.

Details of the failed program came as Democratic lawmakers attempted to boost pressure on the FHFA to allow writedowns of principal on mortgages guaranteed by Fannie Mae and Freddie Mac. Edward J. DeMarco, the acting director of the FHFA, has barred the taxpayer-owned companies from reducing principal on seriously delinquent loans on the grounds that it would hurt their bottom line.

The FHFA is calculating whether changing the policy makes sense in light of new financial incentives the U.S. Treasury Department is offering the companies to forgive principal, DeMarco said in a letter to Representative Elijah Cummings, a Maryland Democrat, and Representative John Tierney, a Massachusetts Democrat.

The two lawmakers said earlier in the day that an FHFA internal study found that a pilot program on principal reductions would save money for the taxpayer-owned companies, but was killed for ideological reasons. DeMarco said the two Democrats were wrong and defended the FHFA’s work.

DeMarco also released an April 12 letter that he sent the lawmakers outlining the details of two Fannie Mae pilot programs. Both programs were terminated before results could be evaluated, he said.

For more, click here.

Collateral Protects 84 Percent of OTC Derivatives, ISDA Says

The percentage of private derivatives trades protected by collateral in the $708 trillion market rose to 84 percent, according to the International Swaps and Derivatives Association.

That’s up from 80 percent of trades that were backed by cash or other assets in last year’s study, New York-based ISDA said in a statement yesterday. About $3.6 trillion in collateral backed trades in the market at the end of 2011, up from $2.9 trillion a year earlier, ISDA said.

About 76 percent of the collateral is in cash, with the remainder in government securities or other assets, ISDA said.

UBS to Pay $27 Million Over SEC Mutual Fund Disclosure Claims

UBS AG will pay $26.6 million to resolve U.S. regulatory claims against its Puerto Rico-based brokerage unit, UBS Financial Services Inc. of Puerto Rico.

The Securities and Exchange Commission claimed the unit sold shares in mutual funds without disclosing that it was propping up the price of the funds in the secondary market. The $26.6 million will be placed into a fund for harmed investors, the SEC said.

The SEC instituted contested administrative proceedings against UBS Puerto Rico’s vice chairman and former chief executive officer, Miguel A. Ferrer, and its head of capital markets, Carlos J. Ortiz.

A phone call to Melvin Brosterman, Ferrer’s attorney, wasn’t immediately returned.

Ortiz said in an e-mailed statement that the SEC’s allegations are “wholly without merit.”

“Investors who bought Fund shares during this period and continue to hold them have made substantial returns over the past three years,” UBS spokeswoman Karina Byrne said in an e-mailed statement. “We believe that any realized losses incurred by investors who bought Fund shares through UBS during the 2008/2009 period and sold them were less than $5 million.”


LG Display Settles Price-Fixing Claims With Eight U.S. States

LG Display Co. reached a settlement with eight U.S. states and consumers over claims that the company colluded with other makers of liquid-crystal displays to fix prices.

The company said May 1 in a regulatory filing that it reached an agreement in principle with a class of so-called indirect purchasers and with the attorneys general of Arkansas, California, Florida, Michigan, Missouri, New York, West Virginia and Wisconsin. Terms of the settlement, which must be approved by a judge, weren’t disclosed.

The settlement doesn’t resolve claims by Illinois, Mississippi, Oklahoma, Oregon, South Carolina and Washington, according to the filing.

Bong-Soo Lee, a spokesman for Seoul-based LG Display, didn’t immediately respond May 1 to an e-mail seeking comment on the terms of the settlements. Brad Brian, a Los Angeles-based lawyer for the company, didn’t immediately return a call to his office.

The case is In Re TFT-LCD (Flat Panel) Antitrust Litigation, 07-01827, U.S. District Court, Northern District of California (San Francisco).


Garrett, Wolin, Levitt on Financial Markets Regulations

U.S. Representative Scott Garrett, a New Jersey Republican, Deputy Treasury Secretary Neal Wolin and Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, participated in a panel discussion on the financial crisis and market regulation.

Peter Cook moderated the panel at the Bloomberg Link Washington Summit.

For the video, click here.

Wells Fargo to Gain as Capital Rules Limit JPMorgan, CFO Says

Wells Fargo & Co., the fourth-largest U.S. bank by assets, could have a “competitive advantage” as bigger lenders are required to hold more funds, Chief Financial Officer Tim Sloan said.

Sloan made the remarks at a conference in Boston yesterday.

Regulators are planning to impose capital rules that will use a sliding scale based on a bank’s size and links to other lenders in an effort to build buffers against losses. Sloan was asked yesterday at the conference whether Wells Fargo might gain as lenders with larger balance sheets, such as Bank of America Corp. and JPMorgan Chase & Co., adjust to the standards.

“I think we will have an advantage to any firm that’s going to have more capital than we do,” Sloan said.

Wells Fargo has grown in U.S. mortgage lending and struck deals for acquisitions including Merlin Securities LLC and BNP Paribas SA’s North American energy-lending business after posting a record annual profit last year.

“There’s no question that the environment in Europe and the capital constraints that those financial institutions have has created an opportunity for us to purchase mostly U.S., dollar-denominated assets,” Sloan said.

Bank of America Chief Executive Officer Brian T. Moynihan and JPMorgan CEO Jamie Dimon have said that excessive capital surcharges on the largest banks could limit lending.

Swaps Rules Cut Risks as Others Need Work, ISDA’s O’Connor Says

Reforms to the $708 trillion private derivatives market are reducing systemic risk while some rules need more work before being implemented, said Stephen O’Connor, chairman of the International Swaps and Derivatives Association.

O’Conner, who is Morgan Stanley’s global head of over-the-counter client clearing, said at ISDA’s annual meeting yesterday in Chicago that there is serious concern’’ about some of the policies underway related to Dodd-Frank Act that toughens oversight of the market. He cited differences between new swaps rules in Europe and the U.S., known as extraterritoriality, and mandated electronic execution for swaps as issues the industry wants to address.

Banks, hedge funds and asset managers active in the over-the-counter derivatives market are adapting to changes mandated by the Dodd Frank Act passed by Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. While embracing measures to adopt clearing, the industry group has opposed requirements that any cleared swap be traded on exchanges or similar electronic systems.

“There’s little to suggest it will benefit users,” O’Connor said, referring to ISDA research that found that requiring electronic trading would reduce trading and increase the gap in prices to buy and sell swaps.

A proposal by the Commodity Futures Trading Commission that traders get a minimum of five price quotes before a transaction “needs further consideration,” O’Connor said. Many bank swaps customers “are opposed to this since excessive inquiry might itself stimulate an adverse price move,” he said.

The reforms are aimed at one of Wall Street’s largest profit centers.

For more, click here.

Separately, clearinghouses backing credit-default swaps trades will be allowed to participate in decisions on payouts or contract changes as an industry group seeks to bolster the process, said Athanassios Diplas, co-chair of a swaps market governance committee.

“We recognize more can be done” to improve how the decisions are made, Diplas, global head of systemic risk management at Deutsche Bank AG in New York, said during a panel discussion yesterday at the ISDA conference in Chicago.

Clearinghouses will be “extended observer status” on the so-called determinations committee that governs the credit-swaps market, said Diplas, who is co-chair of ISDA’s Industry Governance Committee.

The remarks followed the release of a study by New York-based ISDA showing that the committee was unanimous 96 percent of the time in votes on credit swaps payouts or other matters related to the contracts since the panel was created in 2009.

For more, click here.

Wolin Says Runs on Money-Market Mutual Funds Could Be Dangerous

U.S. Deputy Treasury Secretary Neal Wolin said yesterday that “we worry that runs on money-market mutual funds in a stress circumstance could be the start of something that’s very dangerous.”

Wolin, who spoke at the Bloomberg Washington Summit hosted by Bloomberg Link, said that as a result of the Dodd-Frank financial overhaul ‘when firms fail, they will fail. The government will not bail them out.’’

The government now has tools to make sure that any failure “does not infect the broader economy and the broader financial system,” he said.

Wolin also said there is “no evidence” that the regulatory environment is choking off growth in the financial services sector.

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