’Wash Trades,’ India Gold, Ernst & Young: Compliance

High-frequency trading firms are drawing scrutiny from U.S. regulators seeking evidence that they may be distorting market prices by conducting transactions with themselves, said two people with knowledge of the matter.

So-called wash trades, in which a party buys a contract from itself, could be executed inadvertently by firms with multiple algorithms active in the same stock or derivative, said the people, who requested anonymity because the review isn’t public. Such trades, which can alter the price of shares if they are executed above or below market rates, would be illegal if deemed intentional efforts to manipulate stocks.

The Securities and Exchange Commission and Commodity Futures Trading Commission have sharpened their focus on high-frequency and algorithmic trading since May 6, 2010, when about $862 billion was erased from stock values in 20 minutes before share prices recovered from the plunge. Regulators have expressed concern that some firms and electronic exchanges don’t have sufficient controls to prevent a range of events -- from improper trades to programming glitches -- that could roil markets even when there is no wrongdoing.

High-frequency trading, in which computer algorithms are used to buy and sell stocks in fractions of a second, accounts for more than half of equity trading volume.

The CFTC has been considering issuing a so-called concept release, a step prior to a formal rulemaking, which could lead to new testing, supervision and oversight requirements for high-frequency and automated trading.

For more, click here.

Compliance Policy

EU Ministers Clear Way for Transaction Tax in Some States

European Union finance ministers cleared the way for a financial-transaction tax to move forward in at least nine member states after Austria said deadlock among all 27 could threaten the euro area’s rescue fund.

The European Commission’s tax proposal “does not, as required, have unanimous support,” Danish Economy Minister Margrethe Vestager, whose country holds the EU’s rotating presidency, said during a meeting in Luxembourg. Now that an impasse has been acknowledged, a smaller group of as few as nine nations can propose to coordinate a tax among themselves.

Germany and Austria on June 22 said a transaction tax needs to move forward in some form so their lawmakers will approve the 500 billion-euro ($627 billion) European Stability Mechanism for it to start July 9 as planned. Austrian Finance Minister Maria Fekter urged nations to sign up to the next steps.

Negotiations for a tax among all 27 EU nations foundered because of staunch opposition from the U.K., the Netherlands and others. The European Commission last year proposed a broad-based tax on stocks, bonds, derivatives and other transactions that could raise an estimated 57 billion euros annually.

EU Tax Commissioner Algirdas Semeta June 22 said a move to so-called enhanced cooperation among willing nations would be better than no tax at all. Now potential participants need to formally submit a transaction tax proposal with more specifics on how it would work, which must be considered by the commission and all 27 nations before the plan can progress.

For more, click here and click here.

EU May Scrap Planned Rules for Overseas Investment Companies

European Union nations may scrap plans to set uniform rules on the right of overseas-based investment companies to offer services inside the 27-nation bloc.

Officials from a number of governments have called for the plan to be abandoned, Denmark, which holds the rotating EU presidency, said in a document posted on the bloc’s website. The measure was unveiled last year by Michel Barnier, the EU financial services commissioner, as part of a broader overhaul of market regulation.

“Several member states have expressed serious concerns and have strong reservations,” according to the document, dated June 20. EU and U.S. regulators have struggled to align their implementation of international agreements to strengthen the resilience of financial markets, with banks warning that inconsistencies or overlapping rules may increase costs and give foreign competitors an advantage.

The final version of the draft law, known as Mifid, must be approved by governments and the European Parliament before it can go into effect.

Barnier proposed last year that banks and other investment companies based outside the EU should be subject to a so-called equivalence test to determine if they should be granted access to clients in the region. The test would assess whether the company’s home regulator applied rules as strict as those in the EU. Should access be granted, the firm would have a “passport” to operate across all 27 countries.

For more, click here.

Money-Market Fund Overhaul Said to Get SEC Vote as Soon as July

U.S. Securities and Exchange Commission members may vote as soon as next month on a proposal to overhaul regulation of the $2.5 trillion money-market fund industry, according to a person with knowledge of the matter.

The SEC’s five commissioners are expected to receive a formal proposal this week prepared by staff in the agency’s investment management division, according to the person, who isn’t authorized to speak publicly about internal planning. Commissioners typically spend at least a month reviewing staff proposals before voting on them, the person said.

“It’s premature to talk about next steps before the Commissioners have had an opportunity to review an actual proposal and give it some thought,” John Nester, an SEC spokesman, said June 22 in an e-mail statement.

SEC Chairman Mary Schapiro has faced opposition from the fund industry and within the commission as she seeks changes to restore investor confidence shaken by the 2008 credit crisis.

U.S. money funds held a combined $2.5 trillion in assets on June 20, according to the Investment Company Institute, a Washington-based trade group. The largest funds include JPMorgan Prime Money Market Fund, Fidelity Cash Reserves and Vanguard Prime Money Market Fund.

For more, click here.

Compliance Action

Gold Financiers’ Growth Stalls as Rules Tighten in India

India’s biggest lenders that use gold jewelry as collateral say earnings may stall this year as central bank regulation aimed at reducing risk in the banking system chokes off growth.

Net income at Muthoot Finance Ltd. may rise 10 percent in the year that started April 1 after surging an average 86 percent in the past five years, according to Managing Director George Alexander Muthoot. Profit at smaller rival Manappuram Finance Ltd. may be little changed, said I. Unnikrishnan, managing director at the Thrissur, India-based company.

Muthoot and Manappuram are losing clients to money lenders after the Reserve Bank of India tightened rules to curb expansion at the finance companies and reduce risk at their creditors, mainly commercial banks. Manappuram will add no branches on a net basis this year while Muthoot will cut office openings by 75 percent. Manappuram has plunged 47 percent this year making it the worst performing stock in the BSE200 Index.

The Reserve Bank of India ordered gold financiers to raise Tier-1 capital to 12 percent by 2014 and cap loans at 60 percent of the value of the gold used as collateral, according to a statement from the regulator on March 21. The Reserve Bank set up a panel to analyze the implication of gold imports. The panel is expected to submit its report by the end of July, the central bank said.

Indians, the world’s largest buyers of bullion, have stashed 18,000 metric tons of gold in jewelry, coins and other forms, according to data on Manappuram’s website.

For more, click here.

Ernst & Young Cleared by U.K. Regulator Over Lehman Reports

Ernst & Young LLP won’t face sanctions in Britain over the way it dealt with Lehman Brothers Holdings Inc.’s off-balance sheet transactions in 2007, the country’s accounting regulator said.

The probe that started in June 2010 found no wrongdoing by the firm in its accounting for Lehman’s so-called Repo 105 and Repo 108 transactions, which helped the bank raise short-term funds before its collapse, the Financial Reporting Council said June 22 on its website.

Gareth Rees, a lawyer for the regulator’s Accountancy and Actuarial Discipline Board, said in the statement that “no action should be taken against Ernst & Young LLP or any individuals in connection with their conduct in this matter.”

The probe began after revelations the repurchase deals helped Lehman downplay its leverage in late 2007 and 2008. A 2,200-page report on the bank’s collapse, filed in March 2010 by bankruptcy examiner Anton Valukas in New York, said Ernst & Young could be accused of “professional malpractice” for its role in auditing New York-based Lehman.

“Ernst & Young welcomes the decision by the AADB to close this matter with no further action to be taken, confirming our belief in the quality of our audit work,” Vicky Conybeer, a spokeswoman for the company, said in an e-mailed statement.

The regulator is still probing the accounting firm’s preparation of reports on the Lehman unit’s compliance with U.K. rules governing the protection of client money.

U.S. Extends Comment Period for Fracking Disclosure Standards

The Obama administration extended the time for public comment on draft standards for hydraulic fracturing, which may delay a final rule that would require natural-gas producers to disclose the chemicals they use.

The Interior Department will add 60 days to the comment period, spokesman Adam Fetcher said in an e-mail June 22. Comments had been due by July 10.

U.K. Financial Regulator to Probe Swaps, Sunday Telegraph Says

The U.K.’s Financial Services Authority will say on June 29 that it has discovered that some of the country’s banks inappropriately sold complex interest-rate derivatives to small businesses, the Sunday Telegraph said.

Banks expect the regulator to formally investigate the matter, which would take at least a year and could lead to financial penalties for banks and bans on any bankers who violated FSA rules, the newspaper said, without saying where it got the information. Lenders could also be pressed to agree to compensate any victims of misselling, according to the report.


UBS Sued by Pension Plan Over $2.3 Billion Trading Loss

UBS AG was sued in a New York by a pension plan over a $2.3 billion trading loss reported last year that the bank blamed on an alleged rogue trader.

The lawsuit is based on the Swiss bank’s disclosure that a former trader, Kweku Adoboli, engaged in unauthorized trades on behalf of UBS resulting in that loss. Shares fell more than 10 percent on Sept. 15 after that disclosure.

UBS knew or recklessly disregarded evidence that its internal controls were insufficient, the pension plans alleged. They’re seeking group status on behalf of those who traded UBS securities on a U.S. exchange from March 15, 2011, to Sept. 15, 2011, plus an award of unspecified money damages.

Christiaan Brakman, a spokesman for the Zurich-based bank, declined to comment on the lawsuit allegations.

Adoboli, 32, was released from a London prison on June 13 after meeting bail. He has pleaded not guilty. A trial is scheduled for September of this year.

The case is C.D.T.S. No. 1 and A.T.U. Local 1321 Pension Plan v. UBS AG, 12-cv-04924, U.S. District Court, Southern District of New York (Manhattan).

Ex-BAE Lobbyist Charged With Money Laundering in Austria

A former BAE Systems Plc lobbyist was charged in Austria with money laundering and perjury in relation to allegations he paid bribes to officials in eastern and central Europe for weapons contracts.

Alfons Mensdorff-Pouilly received 12.6 million euros ($15.7 million) that had been withdrawn from the London-based defense contractor through fake contracts, Thomas Vecsey, a spokesman for Austrian prosecutors said in a statement.

U.K. prosecutors previously dropped similar charges against Mensdorff-Pouilly in 2010. Mensdorff-Pouilly’s lawyer, Harald Schuster, said the allegations are “old hat” and that his client is innocent.

Leonie Foster, a spokeswoman for BAE Systems, said that the company had no comment.

ICP, Founder Priore Lose Bid to Dismiss SEC Fraud Claims

A federal judge refused to dismiss claims against ICP Asset Management LLC and its founder, Thomas Priore, in a U.S. Securities and Exchange Commission lawsuit alleging fraudulent sales of debt securities.

U.S. District Judge Lewis Kaplan denied the defendants’ motion for partial summary judgment on some of the SEC’s claims, according to a filing June 21 in Manhattan. The case is expected to go to trial, according to court papers.

The SEC accused ICP and Priore in 2010 of making fraudulent transactions involving “tens of millions of dollars” of collateralized debt obligations related to mortgage-backed securities. The fraud “caused clients to overpay” for the securities, the SEC said.

ICP and Priore said the securities involved in the case were not bought and sold in the U.S. Kaplan said in his opinion that sufficient evidence was shown to “at least permit the inference” that the trades complained of were domestic transactions.

The SEC is pleased with the ruling, John Nester, a spokesman for the agency, said in an e-mail.

Anne Rucker, a lawyer for ICP and Priore, didn’t immediately respond to messages seeking comment on the decision.

The case is SEC v. ICP, 10-cv-4791, U.S. District Court, Southern District of New York (Manhattan).

Ex-General Re Executives ‘Resolve’ U.S. Case, Filing Says

Four former executives at General Reinsurance Corp. and one at American International Group Inc., facing a retrial on accounting fraud charges, reached a resolution of the criminal case, according to a court filing.

The filing June 22 by the U.S. Justice Department in federal court in Connecticut doesn’t specify the resolution with prosecutors.

Former General Re Chief Executive Officer Ronald Ferguson, ex-Chief Financial Officer Elizabeth Monrad, ex-Senior Vice President Christopher Garand, ex-Assistant General Counsel Robert Graham, and former AIG Vice President Christian Milton faced a Jan. 22 retrial on charges of defrauding AIG investors.

The U.S. Court of Appeals in New York in August ordered a new trial, reversing the executives’ 2008 convictions. Prosecutors said their scheme involved a sham transaction in 2000 and 2001 to inflate AIG’s loss reserves by $500 million.

The case is U.S. v. Ferguson, 06-cr-137, U.S. District Court, District of Connecticut (Hartford).


Germany Says Joint Euro-Area Debt Requires Common Oversight

The German government reiterated its rejection of joint euro-area bonds before a European summit this week, saying that shared liability for debt must come with common oversight.

“The euro is in a difficult phase,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, told reporters in Berlin today, when asked about Italian borrowing costs. “The high yields that some countries have to pay are part of these difficulties. The German government is well aware of that.”

“But the chancellor is concerned that the wish for allegedly easy ways out is voiced again and again in the days leading up to” the European Union summit on June 28-29, he said.

Germany opposes calls for joint liability out of “the deepest economic and political conviction that liability and oversight go hand in hand,” Seibert said.

Lipton Says Europe Deposit Insurance to Avoid Bank Runs

David Lipton, first deputy managing director at the International Monetary Fund, discussed the need for a shared deposit insurance program in Europe to help avoid bank runs, Spain’s bank bailout and euro bonds.

He spoke with Ryan Chilcote on the sidelines of the St. Petersburg International Economic Forum.

For the video, click here.

U.S. Bank Derivative Exposure ‘Massive,’ Zervos Says

David Zervos, market strategist at Jefferies & Co., talked about the downgrade of 15 global banks by Moody’s Investors Service and the outlook for the U.S. financial industry.

He spoke with Erik Shatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE