StanChart Settles, ECB, Knight ‘Dormant’ Loss: Compliance

Standard Chartered Plc settled a New York money-laundering probe for $340 million a day before the bank was to appear at a hearing to defend its right to continue operating in the state. It still faces federal probes over allegations it helped Iran funnel money through the U.S.

The company rose as much as 5.1 percent in London after the bank settled the New York money-laundering probe.

As part of the agreement, the bank agreed to install an on-site monitor for at least two years who will report directly to state officials. New York regulators will also place examiners at the bank. As a result of the accord, announced yesterday by the state in an e-mailed release, the hearing that had been scheduled for today was adjourned.

On Aug. 6, Benjamin Lawsky, head of the New York Department of Financial Services, or DFS, issued an order accusing Standard Chartered of helping Iran launder about $250 billion in violation of federal laws. One analyst estimated loss of the bank’s New York license could result in a 40 percent drop in earnings.

The settlement amount is the largest ever paid to an individual regulator as part of a money laundering accord. In June, ING Bank NV agreed to pay $619 million to settle similar allegations. That sum was split evenly between a $309.5 million payment to the federal government and an equal sum to the New York District Attorney’s office.

A person familiar with the New York state case said that Lawsky had sought as much as $700 million to settle his investigation. Yuki Finch, a spokeswoman for Standard Chartered in London, declined to immediately comment on the deal.

The resolution still leaves the London-based bank the subject of investigations by the U.S. Treasury, the Federal Reserve Bank, the Justice Department and the Manhattan District Attorney.

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Compliance Policy

EU Banking Plans Call for ECB to Share Power, Documents Show

The U.K. is pressing for the European Central Bank to share power with national regulators as it takes over euro-area bank supervision, according to policy planning documents obtained by Bloomberg News.

The ECB should have a core set of central powers to oversee all banks in the 17-nation currency bloc while delegating some tasks to individual countries, under one option favored by the U.K. and European Union economic policy officials. The ECB supports a similar “light touch” approach that would leave day-to-day supervision for most banks in the hands of national authorities, according to the documents.

Another approach, backed by officials working on EU financial rules, would require the ECB to take major oversight decisions for all banks, the documents show. Officials opposed to this approach say it could compromise the central bank’s reputation and perceived independence, according to the documents, which include EU-level and U.K.-based analysis of the policy debate.

Euro-area leaders in June decided to create a common bank supervisor and beef up the ECB’s oversight role, in order to pave the way for direct bank bailouts from the currency area’s firewall fund. The European Commission, the EU’s regulatory arm, plans to offer a slate of proposals in September so bloc-wide bank supervision can start in 2013.

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New Rules on Suspicious Activity Reporting, ASIC Says

The Australian Securities & Investments Commission has made new market integrity rules for suspicious activity reporting and short sale tagging requirements, the agency said in a statement.

The rules will apply for Australian Securities Exchange and Chi-X markets, according to the statement.

The obligations will require participants of the ASX and Chi-X markets to notify ASIC when they become aware, in the course of their business activities and in the course of complying with existing obligations, of certain suspicious trading activity, the agency said in the statement.

The short sale tagging obligation will start March 1, 2014 and will require market participants to specify, at the time an order is placed, the quantity of a sell order that is a short sale, according to the statement.

Fed’s Dudley Supports Money Fund Rules to Protect U.S. Economy

William C. Dudley, president of the Federal Reserve Bank of New York, said new rules are needed to protect the financial system from a run on money-market mutual funds, lending his support to a regulatory overhaul proposed by U.S. Securities and Exchange Commission Chairman Mary Schapiro.

“A glaring vulnerability exists with money-market mutual funds,” Dudley wrote today in a Bloomberg View column. “Money funds should have capital buffers and modest limits on investor withdrawals. Such reforms are necessary to protect the economy from financial instability in the future.”

Capital cushions and redemption restrictions are part of Schapiro’s plan to bolster money-fund regulation. She has so far failed to win enough backing among her four fellow commissioners, who may vote as early as this month on whether to ask for public comment or kill the proposal.

Any of 105 U.S. money funds with combined assets of about $1 trillion could have been forced below its $1 share price by a single default among its 20 biggest borrowers, Dudley wrote in the column, citing Treasury data.

The number of vulnerable funds increased to 219 if a default occurred among any fund’s top 10 borrowers, according to the annual report of the Treasury’s Office of Financial Research published last month. The study assumed 40 percent recovery on all unsecured lending and full recovery on a fund’s repurchase agreements.

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Compliance Action

Knight $440 Million Trading Loss Said Linked to Dormant Software

Knight Capital Group Inc.’s $440 million trading loss stemmed from an old set of computer software that was inadvertently reactivated when a new program was installed, according to two people briefed on the matter.

Once triggered on Aug. 1, the dormant system started multiplying stock trades by one thousand, according to the people, who spoke anonymously because the firm hasn’t commented publicly on what caused the error. Knight’s staff looked through eight sets of software before determining what happened, the people said.

Knight, based in Jersey City, New Jersey, hasn’t explained in detail what caused the trading losses, which depleted its capital and led to a $400 million rescue that ceded most of the company to a group of investors led by Jefferies Group Inc. The 45-minute delay in shutting down the malfunction has confused some securities professionals, who say that trading programs can typically be disabled instantly.

Chairman and Chief Executive Officer Thomas Joyce, 57, in an Aug. 2 interview with Bloomberg Television’s “Market Makers,” described the situation as “an infrastructure problem.” He said it was “more of a networking problem as opposed to using quantitative tools to trade.”

The company, whose market-making unit executes about 10 percent of U.S. share volume, will hire an outside adviser to investigate what led to the losses. Kara Fitzsimmons, a spokeswoman, said she couldn’t comment at this time.

Knight’s computers bombarded the market with unintended orders just after trading began on Aug. 1, causing volume to surge and prices to swing in dozens of securities. NYSE Euronext canceled trades that were 30 percent or more away from the price at the start of trading, a decision that applied to six securities out of 140 that were reviewed.

The company was updating software in preparation for an NYSE plan aimed at luring more individual investors to the exchange, Joyce said in the Aug. 2 interview, without offering details. The Big Board’s so-called retail liquidity program, designed to attract smaller investors by giving them superior prices, was being implemented that day.

Rules formalizing the treatment of erroneous trades were adopted amid criticism by investors after exchanges and the Financial Industry Regulatory Authority voided transactions totaling 5.6 million shares in the market crash of May 6, 2010. Regulators added guidelines governing when sales or purchases of stock could be canceled after market makers said confusion about which trades would stand prevented them from acting.

Knight lost the market value after the computer malfunction bombarded the market with unintended orders that exchanges declined to cancel. The refusal to let Knight out this time shows that brokers face increasing risks from technology errors after regulators toughened rules following the so-called flash crash two years ago.

The May 2010 flash crash inaugurated reforms aimed at reducing the discretion exchanges have to cancel trades.

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Wells Fargo Pays $6.5 Million to Resolve SEC Broker Claims

Wells Fargo & Co. will pay more than $6.5 million to resolve U.S. Securities and Exchange Commission claims that a brokerage unit and former employee sold complex securities without disclosing risks to investors.

The brokerage now known as Wells Fargo Securities improperly sold asset-backed commercial paper structured with mortgage-backed securities and collateralized debt obligations to municipalities, non-profits and other customers during 2007, the SEC said yesterday in a statement announcing the settled administrative proceeding. The San Francisco-based bank didn’t get sufficient information about the securities and relied almost exclusively on credit ratings, the SEC said.

Wells Fargo, which resolved the SEC’s claims without admitting or denying wrongdoing, will pay $65,000 in disgorgement and $16,751.96 in interest in addition to a $6.5 million fine, the SEC said.

“These issues occurred more than five years ago and pertain to a part of the firm that was completely revamped,” Ancel Martinez, a Wells Fargo spokesman, said in an e-mail. “We are pleased to put this matter behind us.”

Shawn Patrick McMurtry, a former Wells Fargo Securities vice president who left the company in June, will pay a $25,000 penalty and received a six-month suspension, the SEC said.

A phone message left at a listing for McMurtry in St. Paul, Minnesota, wasn’t immediately returned.

Belgian Banks May Be Forced to Go Beyond Basel III, L’Echo Says

The National Bank of Belgium may require the nation’s banks to hold more capital than required under international rules agreed on by the Basel Committee on Banking Supervision, L’Echo reported, without saying how it obtained the information.

The central bank will seek information from lenders this month on how they plan to meet the new international standards, known as Basel III, according to the newspaper.

The Basel rules, to be phased in beginning in 2013, would more than triple the amount of core capital lenders must hold compared to previous international standards.

L’Echo didn’t say how large the extra requirements for Belgian banks would be.

JPMorgan Bank to Hold Collateral After Futures Firms’ Losses

JPMorgan Chase & Co. will allow customers to house excess swaps and futures collateral in a separate bank account as it seeks to reassure investors after losses at MF Global Holdings Ltd. and Peregrine Financial Group Inc.

The new service will allow clients to automatically aggregate excess margin at JPMorgan Chase Bank N.A., the firm’s insured deposit-taking unit, Emily Portney, head of agency clearing, collateral and execution at the New York-based bank, said in a telephone interview.

JPMorgan’s decision shows how the brokerage model is under attack, said Craig Pirrong, a finance professor at the University of Houston. Under that model, futures brokerages earn money on customer collateral by lending it out at higher rates than they pay to the investor or by buying securities with it.

At MF Global and Peregrine, the excess customer money held at the brokerages is what disappeared. Collateral backing trades of MF Global customers that was held by CME Group Inc., as well as Peregrine customer assets maintained by Jefferies Group Inc., were protected.

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EU’s Highest Court Fixes ESM Irish Case Hearing Date for Oct. 23

The European Union’s highest court set the date for oral arguments in a case about the European Stability Mechanism for Oct. 23, according to lawmaker Thomas Pringle, who is challenging Ireland’s ratification of laws on the ESM, the euro area’s future permanent bailout fund.

Ireland’s Supreme Court sought the EU Court of Justice’s view on questions including whether the ESM is compatible with EU treaties and if a decision by EU governments on March 25 to amend a treaty to provide for the ESM is valid.

Parties’ written arguments are to be submitted by Sept. 14, according to an e-mailed statement yesterday by Pringle’s lawyer, Joe Noonan.

The establishment of the 500 billion-euro ($617 billion) ESM is on hold pending a decision by Germany’s highest court. The ruling by the Federal Constitutional Court is due Sept. 12.

The case is C-370/12 Pending Case, Pringle.


Wall Street Needs More Human Interaction, Meyerson Says

Jeffrey Meyerson, market maker and senior managing director at Sunrise Securities Corp., talked about Knight Capital Group Inc.’s $440 million trading loss and electronic trading in the financial industry.

He spoke with Mark Crumpton on Bloomberg Television’s “Bottom Line.”

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Rehn Says Spain Has Open Mind on Sovereign Aid Request

European Union Economic and Monetary Affairs Commissioner Olli Rehn talked about the prospects for a sovereign bailout of Spain and outlook for the European economy.

Rehn, who spoke with Bloomberg Television’s Sara Eisen, also discusses the future of Italy and Greece.

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Hilltop’s Ford Says Glass-Steagall Shouldn’t Have Been Repealed

Gerald J. Ford, who became a billionaire buying distressed lenders during the savings-and-loan crisis, said he believes the Glass-Steagall Act shouldn’t have been repealed.

“We will deal with these large banks that have risk,” Ford, chairman of Dallas-based Hilltop Holdings Inc., said today in an interview on Bloomberg Television’s “Market Makers” with Stephanie Ruhle and Scarlet Fu. “The doctrine or thinking they’re too big to fail will always be with us.”

Former banking executives, government officials, analysts and investors have been calling for the breakup of the biggest banks as the firms’ shares languish at or below tangible book value. Some are calling for the reinstitution of Depression-era Glass-Steagall, which forced deposit-taking companies backed by government insurance to be separate from investment banks.

Sanford “Sandy” Weill, who helped build Citigroup Inc. into one of the world’s biggest lenders, said last month that investment banking should be distinct from traditional banking.

Ford isn’t related to the former U.S. president or carmakers.

Comings and Goings

Resolution CEO Tiner to Retire as Firm Abandons Sale Plans

Resolution Ltd., the insurance buyout firm founded by Clive Cowdery, abandoned plans to sell businesses on the public markets and said John Tiner, head of its management company, will retire.

The boards of publicly traded Resolution Ltd., management firm Resolution Operations and Friends Life, the operating insurance business, will be overhauled as Andy Briggs becomes chief executive officer, the Guernsey, Channel Islands-based company said today. The firm scrapped its return target, said it won’t make any more acquisitions and reported lower earnings.

Cowdery created Resolution in 2008 to buy, merge and sell U.K. life insurers. The European debt crisis and changes to how insurers’ capital is regulated made it more difficult to squeeze cash from the acquired companies’ funds and sell firms on the public markets. Resolution had planned to sell shares in its open and closed life insurance businesses separately by 2014.

Cowdery led Resolution Operations as it charged fees to advise Resolution Ltd on deals. The changes will comply with new U.K. rules on companies that are managed by external entities, Cowdery said on the call.

Tiner, a former head of Britain’s Financial Services Authority, will retire as CEO of Resolution Operations, where he headed implementation of the firm’s strategy. Briggs, the former CEO of Scottish Widows and current head of Friends Life, will replace Tiner as chief of the combined firm, and the companies will merge their boards with the board of Friends Life.

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