Public Pensions, ESMA Report, Gen Re-AIG: Compliance

State and local pensions struggling after years of underfunding and weak investment returns may look even worse under new rules that will limit accounting techniques that hide the extent of liabilities.

The Governmental Accounting Standards Board, which establishes requirements for state and local government financial reporting, will alter how liabilities are calculated and how assets are reported without affecting how much is actually owed to retirees. Under the new guidelines, set to be adopted yesterday, pensions in Illinois, New Jersey, Indiana and Kentucky may have less than 30 percent of assets needed for promised benefits, according to the Boston College Center for Retirement Research.

States and cities rattled by the Wall Street credit crisis four years ago have been under pressure to put more money into their retirement funds and claw back benefits amid investor speculation that pension shortfalls might lead to insolvency.

The magnitude of the shortfalls ranges from $900 billion to more than $4 trillion, depending on the assumptions used to account for benefits that aren’t due for decades.

Long-term promises of defined pension benefits will be categorized as a liability on financial statements for the first time, according to the board. The changes also alter accounting for future benefits and projections of investment returns.

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Compliance Policy

Clearinghouses Should Bear Losses on Member Default, ESMA Says

Derivative clearinghouses should use their own capital to cover losses when members can’t meet their obligations to prevent “a default waterfall,” Europe’s top markets regulator said.

About 50 percent of central counterparties’ capital should be earmarked to cover losses before non-defaulting members need to step in to prevent a collapse, the European Securities and Markets Authority said in a report. The regulator also proposed measures such as tougher collateral requirements and increased trade reporting.

The proposals are part of an overhaul of rules governing derivatives contracts in Europe that are scheduled to be implemented by the end of the year. Global regulators have sought tougher rules for over-the-counter derivatives since the collapse in 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.

Libor Guardians Said to Resist Changes to Broken Benchmark Rate

The U.K. bankers and regulators charged with reviewing Libor in the wake of regulatory probes are resisting calls to overhaul the rate because structural changes risk invalidating trillions of dollars of contracts.

The group, established by the British Bankers’ Association in March after probes into allegations that traders rigged the London interbank offered rate, may propose a code of conduct for banks and impose greater scrutiny of Libor’s correlation with other financial data over time, according to three people with knowledge of the discussions who asked not to be identified because the talks are private. It won’t propose structural changes such as basing the rate on actual trades or taking away oversight of the benchmark from the BBA, the people said.

Libor is determined by a daily poll of banks. Because banks’ submissions aren’t based on real trades, academics and lawyers say they are open to manipulation by traders. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate, the benchmark for $350 trillion of securities.

Some on the committee are arguing that the mechanism for setting Libor remains sound and any cases of wrongdoing were isolated, one of the people said. There is broad agreement that any changes to the rate be incremental, the people said.

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Basel Group Publishes Rules on Banks’ Disclosure of Capital

Global financial regulators released rules on the information banks should publish about their capital levels so that investors aren’t misled.

The Basel Committee on Banking Supervision, which brings together supervisors from 27 nations including the U.S., the U.K. and China, published the rules today on its website.

Compliance Action

BMO Stops Selling Reverse Convertibles Tied to Single Stocks

Bank of Montreal has stopped selling reverse convertibles tied to single stocks, its most popular product in the U.S., as sales of the instruments fall to the least in two years amid regulators’ warnings of their risks.

BMO has sold about $250 million of the single-stock securities in the U.S. since its first offering in September of 2010, according to data compiled by Bloomberg. Its issuance of all types of reverse convertibles fell to $52.3 million in the first five months of 2012, down 40 percent compared with the year-earlier period.

“We are shifting our emphasis to index based reverse convertibles,” Alexis Brown, a spokeswoman for the Toronto-based bank, said in an e-mail, while declining to explain why the decision was made. “We are still in the reverse convertibles marketplace.”

U.S. sales of reverse convertibles, high-yielding bank bonds that convert into stock if a company’s share price plummets, declined to $204.6 million last month, their lowest level since at least the beginning of 2010, continuing a downward trend after a Financial Industry Regulatory Authority warning in July. The industry-backed regulator released an investor alert advising buyers to be wary of advertising suggesting the products are “safe and suitable for investors seeking high yields.”

Sales fell last month even as higher volatility allowed issuers to offer higher-yielding notes.

Former SMBC Nikko Banker Arrested in Probe of Insider Trading

A former SMBC Nikko Securities Inc. executive was arrested June 24 on suspicion that the person was involved in insider trading with three other people.

Japan’s Securities and Exchange Surveillance Commission and Yokohama city prosecutors are investigating former SMBC Nikko executive Hiroyoshi Yoshioka, 50, and the other individuals, the financial watchdog said in a statement.

Japanese regulators are cracking down on insider trading after recent disclosures of leaked information eroded confidence in the nation’s capital markets. Nomura Holdings Inc., the country’s largest brokerage, this month acknowledged its employees’ role in providing confidential data ahead of share sales that the investment bank managed in 2010.

“We are very sorry and we take very seriously that our former executive was arrested,” SMBC Nikko President Eiji Watanabe told reporters June 24. “This should never happen.”

Yoshioka denied that he was involved in insider transactions while he was employed at SMBC Nikko, Watanabe said at the media briefing in Tokyo.

A former executive at the SMBC Nikko brokerage was detained, the banking unit of Sumitomo Mitsui Financial Group Inc. said in a separate statement June 24, without naming the individual. The banker was working for SMBC Nikko at the time of the offense, Sumitomo Mitsui Banking Corp. said in the statement on its website, without elaborating.

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Japan to Ease Trading Restrictions for Off-Exchange Platforms

Japan’s Financial Services Agency plans to ease limits on alternative trading platforms by eliminating the so-called five percent rule for transactions on SBI Japannext and Chi-X Japan Ltd.

The current regulation requires investors to make a takeover bid when they buy more than five percent of a company through off-exchange transactions with more than 10 shareholders. No such rule exists for shares bought on Japan’s conventional bourses. The changes for off-exchange venues that display prices will probably be implemented by October, the securities regulator said today in a statement.

The FSA said it was making the change to encourage competition as the Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co., the country’s two biggest bourses, plan to merge. Growth of alternative trading platforms in Japan has lagged Europe and the U.S., and the five percent rule is one reason why, according to analysts including Jessica Morrison at Deutsche Bank AG.

Dark pools, or trading venues that don’t display prices, will not be exempted from the five percent rule, according to the regulator. The Nikkei newspaper reported the FSA plan earlier today.

The regulator’s plan to ease restrictions on so-called lit venues follows a decision by the Japan Securities Dealers Association in April to allow new venues to keep trading when activity on the country’s main bourse is disrupted.


Comcast Gets U.S. High Court Hearing on Consumer Antitrust Suit

The U.S. Supreme Court will consider whether customers can pursue an $875 million consumer lawsuit alleging that Comcast Corp., the nation’s largest cable television operator, monopolized the Philadelphia market.

The justices yesterday agreed to review a federal appeals court ruling that said the case could proceed as a class action on behalf of as many as 2 million area customers.

A federal judge in April cleared the suit to go to trial on some claims, including allegations that Comcast swapped territories and subscribers with its competitors to ensure it could control the Philadelphia market and charge higher prices. Comcast has denied the allegations.

The case is Comcast v. Behrend, 11-864.

Gen Re, AIG Defendants May Get Fraud Cases Dismissed Under Deals

Four former General Reinsurance Corp. executives and one at American International Group Inc. would win dismissal of accounting fraud charges under proposed deferred-prosecution agreements with the government.

The Justice Department June 22 filed in court five agreements with the executives, who were convicted in 2008 of fraud for helping to deceive AIG investors through a sham transaction in 2000 and 2001.

They were sentenced to prison terms of as much as four years. An appeals court overturned the convictions and ordered a new trial in Hartford, Connecticut.

U.S. District Judge Vanessa Bryant must approve the agreements covering 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. Prosecutors agreed to drop the case in a year if the executives abide by the accords and follow the law.

Each executive would acknowledge that “aspects” of the transaction were fraudulent and acknowledge that they should have tried to stop it from going forward, according to their agreements filed in federal court in Hartford. They would also pay fines ranging from $100,000 to $250,000.

Thomas Carson, a spokesman for U.S. Attorney David B. Fein in Connecticut, declined to comment on the agreements. The case was handled by the federal prosecutors in Connecticut and the Eastern District of Virginia and at the Justice Department in Washington.

Lawyers for the five executives didn’t return phone calls or e-mails seeking comment.

The case is U.S. v. Ferguson, 3:06-cr-00137, U.S. District Court, District of Connecticut (Hartford).

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San Marino Bank Loses Bid to Appeal 2011 Barclays CDO Ruling

A San Marino bank can’t appeal the 2011 U.K. ruling that Barclays Plc didn’t mislead Cassa di Risparmio della Repubblica di San Marino SpA when it sold it collateralized debt obligations in 2000.

A judge in the 2011 case dismissed the claim brought by the bank, which alleged the way the British lender rated the notes at the heart of a 92 million-euro ($115 million) lawsuit was “a scam.”

Barclays had denied the allegations it sold the San Marino bank structured notes that misrepresented the risks.

Dario Loiacono, a lawyer for the San Marino bank, declined to comment on the ruling. A call and e-mail to Barclays didn’t receive an immediate response.

Barclays and lenders in the region previously clashed over CDO transactions.

The case is Cassa di Risparmio della Repubblica di San Marino SpA v. Barclays Bank Plc, 08-757, High Court of Justice, Queen’s Bench Division.

Utah Man Sued by SEC Over $100 Million Real Estate Ponzi Scheme

The U.S. Securities and Exchange Commission accused a Utah man of defrauding investors of $100 million by promising outsized returns in a real estate-based Ponzi scheme.

Wayne L. Palmer and his firm, National Note of Utah LC, told investors they would reap annual returns of 12 percent through his plan to buy mortgage notes and real estate assets, the SEC said in a complaint filed in U.S. District Court in Utah yesterday. National Note used most of the money it took in from new investors to pay its earlier clients, according to the complaint.

The agency said in a statement it obtained a temporary restraining order and asset freeze.

A phone call to Randall Mackey, an attorney for Palmer, wasn’t immediately returned.


MIT’s Johnson Isn’t ‘Optimistic’ Dimon Will Resign From NY Fed

Former International Monetary Fund chief economist Simon Johnson met with Federal Reserve staff members yesterday and said he doesn’t believe the central bank will heed his call to remove JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon from the New York Fed board of directors.

“I have not felt optimistic about either Jamie Dimon resigning or” about the Fed revising its policies for its boards of directors, Johnson, a professor at the Massachusetts Institute of Technology, said yesterday in a call with reporters. The meeting had “nothing that changed my lack of optimism.”

Johnson met with the Fed’s general counsel, Scott Alvarez, and Board Secretary Jennifer Johnson yesterday after circulating a petition on the website calling for Dimon’s removal from the New York Fed’s board. The petition has gained more than 37,000 online supporters, he said.

The directors at the 12 regional Fed banks are under scrutiny following a $2 billion trading loss at JPMorgan that revived concern that its regulator, the New York Fed, is too cozy with Wall Street. Dimon is one of three bankers sitting on the board of the New York Fed.

Dimon ‘Incredibly Frustrated’ by Dodd-Frank, Brown Says

Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talked about his meeting last week with JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon.

He spoke with Deirdre Bolton on Bloomberg Television’s “In the Loop.”

For the video, click here.

Liechtenstein to Focus on Asset Management, Asia, Regulator Says

Liechtenstein banks should focus on asset management and attracting inflows from wealthy Asian clients to rebuild their business, according to Mario Gassner, the head of the Alpine country’s financial regulator.

Liechtenstein’s wealth-management assets have dropped almost a fifth to 166 billion Swiss francs ($173 billion) since Germany used data stolen from the principality’s biggest bank, LGT Group, in 2008 to prosecute tax evaders. The country of 36,000 people agreed in March 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development.

The principality’s tax authority last month wrote to customers of Liechtensteinische Landesbank AG that the U.S. had sent an information request covering accounts that contained at least $500,000 at any time since the beginning of 2004.

Comings and Goings

Turkey Hires Former Islamic Banker as Chief Regulator

Turkey appointed Mukim Oztekin, formerly of Islamic banks Albaraka Turk Katilim Bankasi AS and Asya Katilim Bankasi AS, chief of the country’s banking regulator.

The decision to hire Oztekin for five years was published in the Ankara-based Official Gazette June 22. He last worked as a board member of the Savings and Deposits Insurance Fund, which manages the assets of failed banks, according to state-run Anatolia news agency. He also worked at Turkiye Garanti Bankasi AS, the country’s biggest bank by market value.

Prime Minister Recep Tayyip Erdogan’s government, rooted in an Islamic movement banned from politics in 1997, and other institutions have broken with Turkey’s staunchly secular traditions by seeking to appoint Islamic bankers to key positions in the state.

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