Trading Curbs, JPMorgan CIO, Nasdaq OMX: Compliance

U.S. stock exchanges proposed changes to trading curbs meant to safeguard equity markets, revising an April 2011 proposal for a system that would prevent trades at prices outside a certain band.

The curbs would give markets that list companies and exchange-traded funds new flexibility to pause stocks when doing so may damp volatility, according to a Securities and Exchange Commission filing dated May 24 from venue operators including NYSE Euronext and Nasdaq OMX Group Inc. The system would be implemented in February as a one-year pilot program, said the group, which includes the Financial Industry Regulatory Authority, overseer of more than 4,400 brokers.

Regulators and exchanges introduced curbs after the May 2010 rout known as the flash crash to halt individual stocks when they rise or fall at least 10 percent. Exchanges asked for permission 13 months ago to test a replacement system known as limit-up/limit-down, and the May 24 filing augmented that request in response to comments from brokers and other market participants. The 2011 proposal was never implemented.

“The plan will reduce the negative impacts of sudden, unanticipated price movements in NMS stocks, thereby protecting investors and promoting a fair and orderly market,” the exchanges and Finra wrote, using the acronym for national market system.

The SEC must approve the filing before it can be implemented. The regulator must make a decision by May 31, according to an SEC notice when a ruling was last delayed.

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Compliance Policy

After JPMorgan Loss, U.S. Regulator Ponders Tighter Volcker Rule

The main U.S. derivatives regulator will discuss whether to tighten exemptions to a proposed ban on proprietary trading after JPMorgan Chase & Co. announced at least $2 billion in credit-derivatives trading losses.

The U.S. Commodity Futures Trading Commission gathered input yesterday for a final rule, required from five U.S. regulators under the 2010 Dodd-Frank Act. Sheila Bair, former chairman of the Federal Deposit Insurance Corp., Keith Bailey, managing director at Barclays Plc, and Peter Antico, managing director at Credit Suisse Group AG, were scheduled to discuss exemptions from the ban for hedging and market-making.

Regulators including the Federal Reserve, FDIC and Securities and Exchange Commission have faced pressure following JPMorgan’s announcement to tighten the so-called Volcker rule.

The rule -- named for former Fed Chairman Paul Volcker, who during the Dodd-Frank debate proposed limiting banks’ proprietary trading activity -- is intended to reduce risky trades by banks that hold federally insured deposits and have access to the Federal Reserve’s discount window. A half-dozen participants scheduled for the CFTC roundtable, including Simon Johnson, a professor at the Massachusetts Institute of Technology, have urged a stronger ban.

JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley are among banks that have urged regulators to delay and ease parts of the rule. The 298-page proposal was released by five regulators in October.

Taiwan’s Cabinet Agrees to Revise Capital-Gains Tax; Stocks Drop

Taiwan’s Cabinet reached an agreement with ruling lawmakers on a plan that will make wealthier investors and larger shareholders pay a capital-gains tax. The Taiex stock index fell the most among global benchmark indexes.

Under the plan, investors who own more than 3 percent of shares in a listed company or whose annual net income exceeds NT$5 million ($167,185) must pay the tax, the Cabinet said in a statement today. The plan was revised from the Kuomintang’s proposal on May 28 that gave investors the option of choosing from a flat rate or a levy on share trades that links tax rates to the performance of the benchmark Taiex stock index.

The government and Kuomintang have been at odds over a tax on securities transactions that is aimed at narrowing a wealth gap among Taiwan’s population and bolstering government finances as the economy slows. Taiwan has exempted securities transactions from capital-gains taxes since Jan. 1, 1990, according to the stock exchange’s website.

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Mutual Funds Urge Regulators to Limit Advertising by Hedge Funds

Mutual funds are pushing for limits on hedge fund advertising permitted under the Jumpstart Our Business Startups Act, saying such ads may hurt investors and damage the entire fund industry.

The law’s repeal of a ban on the marketing of private offerings to the general public may result in misleading advertisements for hedge funds, Robert Grohowski, a senior counsel at the Washington-based Investment Company Institute, wrote in a blog posting yesterday. The group represents more than 13,000 funds with more than $13 trillion in assets.

In the past, securities laws generally required firms to market non-publicly traded securities only to so-called accredited investors with whom they’ve had an existing relationship.

In a comment letter to the Securities and Exchange Commission last week, the ICI urged regulators to impose restrictions on private fund advertising that are at least as extensive as those for mutual funds. The group also suggested a ban on advertising hedge funds’ performance until rules are established governing how to calculate the returns, according to the letter, which is posted on the ICI’s website.

BlackRock Inc., the world’s largest asset manager, supports the removal of the ban on general advertising, according to a letter the firm sent to the SEC last month.

The ICI’s position was reported earlier yesterday by Dow Jones.

Banks, Advisers Face Disclosure of Payments in Muni-Bond Deals

Banks and financial advisers may be forced to publicly disclose payments made in connection with U.S. state and local-government bond deals, a move aimed at revealing potential conflicts of interest to investors.

The Municipal Securities Rulemaking Board, which crafts regulations for the $3.7 trillion market, is considering whether to require underwriters and advisers to disclose fee-splitting agreements or other incentive payments tied to municipal-finance deals. Banks already must begin reporting such arrangements in August to municipalities under rules approved by regulators.

The disclosures would shed light on hidden incentives offered to banks and advisers in exchange for recommending transactions to government officials. The board, known as the MSRB, said yesterday it is soliciting comments on whether to require disclosures on Emma, a website used to make municipal-bond documents available to investors and the public.

Targets would include incentives for third parties who steer business to a particular underwriter or financial adviser, according to the statement. The move follows instances in which U.S. regulators have focused on undisclosed payments between those involved in municipal-finance deals gone bad.

Compliance Action

JPMorgan CIO Pricing Said to Differ From Investment Bank’s

The JPMorgan Chase & Co. unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter.

The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.

The biggest U.S. bank by assets is facing regulatory scrutiny and criminal probes over losses in the CIO, which Chief Executive Officer Jamie Dimon pushed in recent years to make bigger and riskier bets with the bank’s money. The loss, which Dimon said stemmed from positions that were “poorly monitored,” prompted calls from Congress for tighter bank regulation and triggered criminal investigations by the U.S. Justice Department and Federal Bureau of Investigation.

Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment on whether the CIO and investment bank were using different prices.

“All components of the synthetic credit portfolio in the chief investment office were mark-to-market,” she said.

The trades in question, made by a CIO group that included Bruno Iksil, nicknamed the London Whale because his positions grew so large, were on so-called tranches of credit-swap indexes, the people said.

Because JPMorgan had amassed such large positions, even a small change in how the prices were marked may have generated a big difference in the value of the trades, one of the people said.

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Nasdaq Public Safeguards in Facebook Seen as Focus of Regulators

Nasdaq OMX Group Inc.’s handling of Facebook Inc.’s initial public offering has already led to lawsuits and may cost brokers $100 million. What Securities and Exchange Commission officials will want to know is whether the market operator put the public’s interest first.

The $16 billion IPO of the largest social networking company, founded in 2004 by Harvard University student Mark Zuckerberg, was supposed to be a victory for Nasdaq OMX, chosen by Facebook over rival NYSE Euronext. The debut was anything but, with the first day of trading on May 18 marred by delays, mishandled orders and investor uncertainty.

A review by the SEC that has yet to be completed shows technical failures precipitated the trading issues, not a violation of industry rules, the Wall Street Journal said May 30, citing people familiar with the matter who it didn’t name.

“We continue to review issues related to the IPO and have drawn no conclusions,” John Nester, an SEC spokesman, said in an e-mail yesterday. Joseph Christinat, a Nasdaq OMX spokesman, declined to comment, as did Ashley Zandy, a spokeswoman for Menlo Park, California-based Facebook.

Nasdaq OMX Chief Executive Officer Robert Greifeld acknowledged that a “poor design” in software put the opening auction that set the price for the first traded shares into a loop that delayed its completion. Executives of the company, which operates the Nasdaq Stock Market, “believed they had the right solution” as they worked to start trading, Eric Noll, the executive vice president for transaction services, said in a statement provided by spokesman Robert Madden on May 22.

If warranted, the most likely SEC sanction against Nasdaq OMX would be a fine, according to Thomas Hazen, a professor at the University of North Carolina at Chapel Hill’s School of Law.

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Dodd-Frank Exemption for Single N.Y. Bank Expected to Advance

A New York City bank with $10.5 billion in assets would be the sole beneficiary of a Dodd-Frank Act exemption being considered by the House Financial Services Committee.

Emigrant Bank, which has about $10.5 billion in assets, has asked lawmakers on the committee to approve a change to the 2010 financial-regulation overhaul law that will save the institution $300 million. The committee was expected to vote yesterday to approve the change.

A group of New York lawmakers, led by Republican Representative Michael Grimm, have taken up the bank’s cause, arguing that it would be unfairly punished for protecting itself during financial stress. The measure would retroactively change the date used to determine which institutions are exempt from new rules on how to consider trust-preferred securities.


Citigroup Whistle-Blower Wins $31 Million Settlement

Citigroup Inc., laid low by bad mortgages, was the most bailed-out U.S. bank during the 2008 financial crisis. Whistle-blower Sherry Hunt, a Citigroup executive, detailed how the bank continued to buy and sell flawed home loans, even into 2012.

Bloomberg’s Bob Ivry spoke with Neil Barofsky, former special inspector general of the Troubled Asset Relief Program and a Bloomberg contributing editor, about the bank’s mortgage practices. The story appears in the July issue of Bloomberg Markets.

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Abacus Bank, 19 People Charged in Fannie Mae Mortgage Fraud

Abacus Federal Savings Bank and 19 individuals were charged with mortgage fraud and accused of selling hundreds of millions of dollars in fraudulent loans to Fannie Mae, Manhattan District Attorney Cyrus Vance Jr. said.

Abacus, which primarily serves the Chinese-American community, pleaded not guilty before Judge Renee A. White in state court in Manhattan yesterday. The bank is “disappointed” to learn of the indictment as it discovered and investigated the issue more than two years ago, fired some employees and reported the results to law enforcement, its regulator and Fannie Mae, the bank said in a statement.

Vance’s office is “overreaching” in accusing Abacus “when many other banks that contributed to the national economic crisis remain untouched,” it said.

The district attorney called the bank’s help “too little, too late” at a press conference.

Loans covered by the indictment were made to 4,500 borrowers and were among about $1 billion in loans that the bank sold to Fannie Mae, which then unwittingly packaged them as mortgage-backed securities and sold them to investors, Vance said.

The charges cover activities from May 2005 to February 2010 and follow a 2 1/2-year investigation, according to prosecutors. Eight Abacus employees have admitted their guilt in the first indictment of a bank in Manhattan since 1991, Vance said.

Abacus, a full-service bank based in New York, was founded in 1984, according to its website.

The case is The People of the State of New York v. Abacus Federal Savings Bank, 2480-2012, New York State Supreme Court, New York County (Manhattan).


Gensler Says JPMorgan Shows Need to Finalize Reforms

Commodity Futures Trading Commission Chairman Gary Gensler talked about JPMorgan’s trading loss and efforts by U.S. regulators to reduce market risks.

He spoke with Peter Cook on Bloomberg Television’s “In the Loop.”

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Bair Says Tighten Hedging Provision in Volcker Rule

Former Federal Deposit Insurance Corp. Chairman Sheila Bair discussed the Commodity Futures Trading Commission’s meeting on the Volcker Rule.

Bair, who spoke with Peter Cook on Bloomberg Television’s “InBusiness,” said compensation shouldn’t be based on hedging profits.

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Basel’s Ingves Warns Against Relying on Ratings for Risk Models

Investors shouldn’t only look at credit ratings when assessing risk and need to rely more on their own analysis, said Stefan Ingves, the head of the Basel Committee on Banking Supervision.

“When it comes to how one looks at rating agencies,” financial market participants “should at least not rely solely on external ratings without making their own considerations or judgments at all,” Ingves, who is also the governor of Sweden’s central bank, said in response to questions in Stockholm today.

Rating companies have come under scrutiny since failing to identify some of the imbalances that led to the global financial crisis. Denmark, which holds the rotating European Union presidency, said May 21 it won backing in the 27-member bloc to curtail the influence of rating companies and pledged to push for more competition in the industry. Denmark also wants to allow issuers and investors better access to suing rating companies should they fail in their job.

Investors in Sweden’s biggest banks shrugged off downgrades last month by Moody’s Investors Service, sending bond and share prices higher.

According to Ingves, “those who make decisions in the world of banking, in the financial sector, will have to do a bigger share of the work” in assessing risk.

Comings and Goings

FDIC’s Rymer to Serve as Interim SEC Inspector General, BNA Says

Jon T. Rymer, inspector general of the Federal Deposit Insurance Corp., will serve as the interim inspector general for the U.S. Securities and Exchange Commission, the SEC said in a statement yesterday, BNA reported.

Rymer will serve in the role at the SEC until a permanent inspector general is on board and will continue to carry out his FDIC duties, the SEC said.

Noelle Maloney, who has been interim inspector general since H. David Kotz left the SEC in January, will resume her role as deputy inspector general, the SEC said in the statement.

Two Senior SEC Investigators to Leave Agency for Private Firms

Two senior U.S. Securities and Exchange Commission investigators are stepping down this month to join private law firms, leaving vacancies atop two units formed in 2010 in an overhaul of the enforcement division.

Robert Kaplan, co-chief of a 75-person unit that investigates misconduct at hedge funds and private-equity firms, will join Debevoise & Plimpton LLP in Washington as a partner on June 5, the firm said in a statement yesterday. Thomas Sporkin, who heads an SEC group tasked with vetting and handling tips, is moving to BuckleySandler LLP in the coming weeks, according to a statement by that firm.

SEC Enforcement Director Robert Khuzami enlisted Kaplan and Sporkin two years ago as part of an effort to develop specialized expertise and catch frauds earlier. Khuzami hasn’t publicly announced who will fill the vacant posts.

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