Libor Spurned, Credit Scores, German Audit: Compliance

The British Bankers’ Association signaled it will give up oversight of the London interbank offered rate following claims traders manipulated the benchmark.

Financial Services Authority Managing Director Martin Wheatley is reviewing whether to bring oversight of the benchmark under the control of regulators after Barclays Plc, Britain’s second-biggest lender, paid a record 290 million-pound ($471 million) fine in June for manipulating Libor. Regulators worldwide are probing at least a dozen banks over allegations they also tried to rig the rate.

The London-based lobby group said in a statement yesterday that it will support Wheatley’s recommendations.

The BBA’s role as guardian of Libor, used to set rates for at least $300 trillion of securities, has been under pressure since the Bank for International Settlements first raised concern in 2008 that the benchmark was being manipulated.

The BBA’s response was branded inadequate by the Bank of England, while U.S. Treasury Secretary Timothy Geithner has said private, unregulated bodies such as the BBA shouldn’t oversee rates such as Libor.

After regulators began to probe Libor again last year, the BBA started another internal review of the benchmark. The BBA’s council passed a motion on Sept. 13 to give up responsibility for overseeing the rate, two people with knowledge of the plan said yesterday. They asked not to be identified because the meeting was private.

The BBA represents more than 200 banks and lobbies policy makers and regulators on behalf of the industry.

Dan Doctoroff, chief executive officer of Bloomberg LP, has proposed an alternative to Libor dubbed the Bloomberg Interbank Offered Rate, or Blibor. It would use data from a variety of financial transactions to better reflect participating banks’ real cost of credit. Bloomberg LP is the parent of Bloomberg News.

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Separately, the watchdog for the U.S. financial crisis bailout program said the Treasury Department and Federal Reserve should stop using the London interbank offered rate for transactions tied to the Troubled Asset Relief Program.

Use of Libor for TARP should not continue because “there’s no confidence or assurance that it’s reliable” and it could potentially be subject to manipulation, Christy Romero, special inspector general for TARP, said in an interview. The Treasury’s Public-Private Investment Program, or PPIP, and the Fed’s Term Asset-Backed Securities Loan Facility, or TALF, should use rates other than Libor, she said. There are alternative interest rates in the contracts for both TARP programs, Romero said.

Confidence in Libor, the benchmark interest rate for more than $500 trillion of securities, was shaken following Barclays Plc’s admission in June that it submitted false rates. Barclays was fined 290 million pounds ($471 million) by regulators in the U.S. and U.K.

Fed spokeswoman Barbara Hagenbaugh said in an e-mail Sept. 24 that the central bank had received the request from Romero and plans to respond. Under TALF, a bailout program that started operating in March 2009, the Fed lent funds to investors in highly rated asset-backed securities and commercial mortgage-backed securities.

The Treasury Department also has received Romero’s recommendation on PPIP and plans to respond “shortly,” spokesman Matthew Anderson said Sept. 24. PPIP was started in 2009 to help revive the mortgage-backed securities market. The Treasury has estimated that taxpayers will get a $3 billion profit from PPIP.

TARP was enacted under the George W. Bush administration amid the 2008 financial crisis.

Compliance Policy

CFTC Will Give Banks 2 Minutes to Accept or Reject Cleared Swaps

Swaps dealers will have two minutes to accept or reject trades that will be sent to clearinghouses starting next month, the Commodity Futures Trading Commission said in the most-detailed requirement about timing to date.

The time allowed for trade approval will fall to one minute 90 days after the CFTC rules are published in the Federal Register, according to a Sept. 21 e-mail sent by Ananda Radhakrishnan, director of the division of clearing and risk. Banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley have argued that the technology to instantly verify the credit and risk allowance of their customers doesn’t exist and asked the CFTC to reconsider.

The CFTC time limits, verified by spokesman Steve Adamske, contrast with the commission’s final rule in this area, which stated that acceptance be done “as quickly after submission as would be technologically practicable if fully automated systems were used.” The rule is set to become effective Oct. 1.

The e-mail, a copy of which was obtained by Bloomberg News, was sent to executives at clearinghouse owners CME Group Inc., Intercontinental Exchange Inc., LCH.Clearnet Group Ltd. and representatives of the Futures Industry Association.

Germans Tout Bailout Safeguards With Seat on ESM Audit Board

Germany’s top auditor will have a say on oversight and decision-making at Europe’s permanent rescue fund, developments that the Finance Ministry in Berlin said offer added protection to taxpayers when the backstop comes online next month.

Draft bylaws for the fund, known as the European Stability Mechanism, include a formula for which nations will serve on its audit board, according to a copy prepared for German lawmakers and obtained by Bloomberg News. The oversight board will examine the fund’s performance, risk management and compliance, and will have full access to all ESM documents and reports, the draft shows.

Germany’s Finance Ministry said in a letter accompanying the draft that the proposed rules ensure Germany’s court of auditors will take part. “In the negotiations, the government laid the groundwork for the Federal Court of Auditors to be able to have a seat on the Audit Committee from the moment the ESM is set up,” the ministry said.

The audit move underscores government efforts to reassure voters one year out from federal elections that Chancellor Angela Merkel’s euro rescue efforts won’t squander public money. It follows a decision by Germany’s top constitutional court this month not to block the fund’s launch.

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Banks Prevented by SEC From Hiding Some Municipal Bond Yields

The U.S. Securities and Exchange Commission approved regulations that will prevent banks from keeping secret the yields on certain state and local government bonds during the first trading day.

The SEC on Sept. 21 approved rules that require underwriters to disclose yields on bonds that aren’t immediately offered for resale to investors, the Municipal Securities Rulemaking Board said Sept. 24. The board proposed the change in March, which will require more rapid dissemination of information that previously may not have been available to the public until the end of the trading day.

The rules are aimed at injecting more transparency into the $3.7 trillion municipal bond market, which is used by states, cities and school districts to finance public projects.

The change will make it easier for public officials and investors to compare yields on newly issued bonds during the first trading day. It takes effect on Nov. 1.

The SEC approves and enforces rules proposed by the Municipal Securities Rulemaking Board.

Compliance Action

Consumers Given Different Credit Scores Than Lenders, CFPB Says

One in five U.S. consumers is likely to receive a credit score different than the one given to lenders, potentially closing off access to credit for millions of Americans, the Consumer Financial Protection Bureau found in a study released yesterday.

The study came five days before the consumer agency, created by the Dodd-Frank law of 2010, is to begin supervision of credit-reporting companies’ records and practices. The work involves direct examination of about 30 businesses, including the three biggest, Equifax Inc., Experian Plc and TransUnion Corp.

Under the Fair Credit Reporting Act, consumers are entitled to a free copy of their credit report each year. Consumer advocates have long charged that credit-reporting companies provide varying scores to lenders, potentially driving the cost of credit higher or depriving consumers of it entirely.

SEC Says New York Firm Allowed High-Speed Stock Manipulation

A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.

Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said yesterday in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines.

The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics. The trading in this case occurred from at least January 2009 to September 2010, the agency said.

Along with Hold Brothers, the SEC charged its co-founder and president, Steve Hold, who created and partially owned Trade Alpha and Demonstrate, according to yesterday’s release. Robert Vallone, a former chief compliance officer and chief financial officer, and William Tobias, another executive, were also charged and agreed to the penalties.

A phone call to the Hold Brothers main number and an e-mail to the general media address weren’t immediately returned.

The Financial Industry Regulatory Authority and exchanges owned by Nasdaq OMX Group Inc., NYSE Euronext and Bats Global Markets Inc. fined Hold Brothers $3.4 million for manipulative trading activities and other violations, bringing the total fines to the broker to more than $5.9 million.

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RBS Instant Messages Show Libor Rates Skewed With Traders

Royal Bank of Scotland Group Plc trader Tan Chi Min told colleagues the firm was able to move global interest rates, according to court filings.

Transcripts of the internal instant messages were included in a 231-page affidavit filed Sept. 19 by Tan, the bank’s former Singapore-based head of delta trading for Asia, who’s suing Britain’s third-biggest lender by assets for wrongful dismissal after being fired last year for allegedly trying to manipulate the London interbank offered rate, or Libor.

The conversations among traders at RBS and firms including Deutsche Bank AG illustrate how the risk of abuse was embedded in the process for setting Libor, the benchmark for more than $300 trillion of securities worldwide. RBS, 81 percent-owned by the British government, is one of at least a dozen banks being probed over allegations they colluded to manipulate the rate so they could profit from bets on interest-rate derivatives.

RBS sent Tan copies of instant-message chats he had with others as evidence of potential wrongdoing in an Aug. 29, 2011, letter telling him the bank was bringing disciplinary proceedings against him, the papers show. Tan said in his lawsuit, filed in December, that the bank had condoned the rates manipulation and sought scapegoats in an internal probe.

The bank asked in a Sept. 24 filing that the Singapore High Court seal the papers until at least one of the probes by the U.S. Commodity Futures Trading Commission, the Justice Department’s fraud division and Britain’s Financial Services Authority is completed.

Making the documents publicly accessible may have “extensive potential prejudice” on the confidential regulatory investigations, RBS said in the filing. The court documents, inspected yesterday, have now been sealed.

“Our investigations into submissions, communications and procedures relating to the setting of Libor and other interest rates are ongoing,” the bank said in an e-mail. “RBS and its employees continue to cooperate fully with regulators.”

The case is Tan Chi Min v. The Royal Bank of Scotland. S939/2011. Singapore High Court.

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SAC Manager Said to Be Uncharged Insider-Trading Conspirator

A hedge fund manager at Steven Cohen’s SAC Capital Advisors LP is an unindicted co-conspirator in a $62 million insider-trading scheme tied to technology stocks, two people familiar with the matter said.

The role allegedly played by Michael Steinberg emerged in court papers filed by the U.S. in the securities-fraud case of Jon Horvath, a former technology analyst at Cohen’s $14 billion hedge fund whom Steinberg supervised. Steinberg, who hasn’t been charged with a crime, is the fifth person to be tied to insider trading while employed at SAC.

Horvath faces trial Oct. 29 in Manhattan federal court along with two other portfolio managers for his part in what Manhattan U.S. Attorney Preet Bharara called a “criminal club:” a conspiracy of hedge fund managers, co-workers and company insiders who reaped millions of dollars on illegal tips about Dell Inc. and Nvidia Corp.

“The government added four additional co-conspirators,” prosecutors wrote in a Sept. 6 letter filed with the court, with the names blacked out. One of them, the U.S. said, is “the portfolio manager to whom Jon Horvath reported at his hedge fund.” That person was Steinberg, said the people, who declined to be identified because the matter isn’t public.

Steinberg, 40, of SAC’s Sigma Capital Management unit, has worked at the hedge fund since 1997. His lawyer, Barry Berke, declined to comment on the letter.

Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, and Ellen Davis, a spokeswoman for Bharara, declined to comment on the court filing.

Horvath, and his co-defendants, Level Global Investors LP co-founder Anthony Chiasson and ex-Diamondback Capital Management LLC portfolio manager Todd Newman, are accused of participating in a conspiracy with other portfolio managers, analysts and insiders at technology firms who swapped tips between 2007 and 2009.

The case is U.S. v. Newman, 12-00124, U.S. District Court, Southern District of New York (Manhattan).

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UBS Co-Workers Knew of Fictitious Trades, Adoboli Told Lawyer

Kweku Adoboli’s co-workers knew he was making fictitious trades, the former UBS AG banker told an attorney who interviewed him on the night of his arrest in September 2011.

Adoboli told Damien Byrne Hill, a lawyer at Herbert Smith LLP who represented the Swiss bank, that his colleagues on the exchange-traded funds desk were aware of fake trades from May, though they didn’t know the extent of his positions.

Hill’s notes from the discussion with Adoboli, read out by a prosecutor at the former trader’s fraud trial in London yesterday, indicated that while his colleagues were “unhappy” about the trades, they didn’t alert managers.

Adoboli, 32, has pleaded not guilty to charges of fraud and false accounting over unauthorized trades on which UBS lost $2.3 billion. The former trader admitted hours before his arrest that he had risked $5 billion on Standard & Poor’s 500 futures and a further $3.75 billion in the German futures market, a former manager testified.

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SEC Fraud Lawsuit Deadlines Draw Review From U.S. Supreme Court

The U.S. Supreme Court agreed to hear an appeal that seeks to force the Securities and Exchange Commission to move more quickly in pressing fraud lawsuits.

The justices yesterday said they will hear arguments from two Gabelli Funds LLC officials seeking to block SEC claims that they improperly let a client engage in market timing, a practice of making frequent, short-term trades at the expense of other investors.

Marc J. Gabelli and Bruce Alpert contend that the SEC sued after the five-year window for seeking penalties had expired. A federal appeals court in New York said the suit could go forward because the window doesn’t open in fraud cases until the SEC has reason to know a violation has occurred.

The case raises issues similar to those addressed by the Supreme Court in 2010, when it ruled that the two-year period for shareholder fraud suits doesn’t begin until investors have indications of intentional company wrongdoing. The new case concerns SEC enforcement actions, rather than private suits.

Gabelli and Alpert contend that, under the appeals court ruling, “the SEC would be able to bring an ancient claim on the mere allegation that it did not discover and could not have discovered the violation earlier.”

The court will hear arguments early next year and rule by June. The case is Gabelli v. SEC, 11-1274.

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