Pakistan has drafted rules to develop the Islamic capital market as the central bank seeks to increase assets that comply with religious tenets to 15 percent of the total in five years.
The “Issuance of Sukuk Regulations 2012” allows companies to sell Shariah-compliant notes so long as they have no overdue loans, the Securities Exchange Commission of Pakistan, said in an e-mailed statement Oct. 4. The issuer and the underlying assets should also not be rated lower than BBB-, it said.
Each company must appoint a Shariah scholar to ascertain that the sukuk meets Islamic principles and assign a fatwa, or legal ruling, according to the statement. Proceeds should also be used in accordance with Shariah law, it said. Businesses involved in activities such as gambling, prostitution, alcohol and some entertainment establishments are deemed unethical in the Islamic world.
Pakistan is amending rules as it seeks to boost Shariah deposits to finance a budget deficit that is 7.4 percent of gross domestic product, the highest since 2009. The nation aims to increase Islamic banking assets from the current 8 percent in five years, the central bank said in a statement on Sept. 4, citing Deputy Governor Kazi Abdul Muktadir.
U.S. Regulator Proposes Uniform System for Mortgage Securities
The U.S. overseer of Fannie Mae and Freddie Mac, planning for when the companies are eliminated or their role diminished, is seeking input on a system to standardize the packaging of home loans into securities.
The plan would create a common method of issuing bonds, overseeing servicers, making payments to investors, and tracking loan performance, among other things, the Federal Housing Finance Administration said in a white paper released last week. It would also standardize pooling and servicing contracts underlying the securities.
The system could be used either by Fannie Mae and Freddie Mac or by issuers of private-label securities, FHFA said.
The proposal is part of the regulator’s effort to lay the groundwork for the two government-sponsored enterprises to shrink or be wound down entirely. Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008. About 75 percent of mortgage securities are created by the two enterprises.
Neither Congress nor President Barack Obama have moved forward with plans to overhaul the housing-finance system and determine the companies’ fate. Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac dominate the U.S. mortgage market.
FHFA has been pushing Fannie Mae and Freddie Mac to standardize their operations to reduce taxpayers’ costs and make it easier for sellers, servicers and investors to work with the two companies.
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U.K. Banks May Need $36 Billion of Capital, Morgan Stanley Says
U.K. banks may be driven by regulators to hold as much as 22 billion pounds ($36 billion) of extra capital to guard against residential mortgage losses, according to Morgan Stanley analysts.
The Financial Policy Committee will likely require that banks increase the risk weightings they apply to residential mortgages, with Lloyds Banking Group Plc the most affected, the analysts including Chris Manners wrote in a report Oct. 5.
The FPC is concerned that banks are allowed to assign different risk weights to mortgages based on their own internal models. The group recommended in March that Parliament give it powers of direction over capital buffers and requirements relating to areas such as residential mortgages and leverage ratios.
Former SEC Watchdog Kotz Violated Ethics Rules, Review Finds
The former internal watchdog for the U.S. Securities and Exchange Commission violated ethics rules by overseeing investigations that touched on people with whom he had “personal relationships,” an outside review found.
H. David Kotz, who resigned as the agency’s inspector general in January amid questions about his tactics and conduct, shouldn’t have participated in a probe of the SEC’s office re-organization because he engaged in “extensive” and “flirtatious” communications with an employee associated with the project, according to the review.
Kotz also shouldn’t have opened an investigation related to R. Allen Stanford’s Ponzi scheme because he was friends with a female attorney who represented victims of the fraud, investigators said in the 66-page report.
The outside review of Kotz’s activities was led by David Williams, the inspector general of the U.S. Postal Service. He created a report dated Sept. 17, which was released in response to a public records request.
Kotz didn’t respond to requests for comment on the review.
Kotz “appeared to have a conflict of interest” when he opened and supervised an investigation into the court-appointed receiver in the Stanford case because of his relationship with Gaytri Kachroo, a Massachusetts attorney, the review found. One month after beginning the probe, Kotz listed her as a business reference and a “personal friend,” the report noted.
Kachroo, who declined to be interviewed for the report, said she was one of many who asked Kotz to probe the Stanford receiver.
“My understanding is that the investigation of the Stanford receivership would not have been initiated but for numerous complaints made before ours,” Kachroo said in an e-mail. “The request made by my firm was a formal letter request made on behalf of hundreds of Stanford victims my firm represents, who have no relationship with Mr. Kotz whatsoever.”
In a response included in the report, Kotz said that he met with Kachroo after his departure from the SEC in an effort to “drum up business” for his new job. He indicated that their meeting didn’t result in a close business relationship or additional work for his company.
The review also called into question Kotz’s work relating to the Bernard Madoff Ponzi scheme.
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Swaps Regulator Must Address Dodd-Frank Questions, Chilton Says
The U.S. Commodity Futures Trading Commission must answer bank, energy and other firms’ requests for guidance on Dodd-Frank Act swaps measures before pursuing legal action on rules taking effect Oct. 12, Commissioner Bart Chilton said Oct. 5.
“If we don’t respond, there is no way I can envision the agency taking an action against them,” Chilton said in a telephone conference with reporters.
India Eight-Second Stock Rout Brings Trading Paranoia to Mumbai
The plunge and rebound in Indian stocks that pushed the S&P CNX Nifty Index down 16 percent over eight seconds underscored concern about financial markets.
Trading in the Nifty and some companies stopped Oct. 4 in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16 percent. A brokerage that mishandled trades for an institutional client was to blame, according to the National Stock Exchange of India.
Regulators around the world are probing market structure and electronic trading after a series of malfunctions. In May 2010, high-frequency orders worsened the so-called flash crash, which briefly wiped $862 billion from U.S. stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed in the public debut of Facebook Inc., 2012’s largest initial public offering.
Orders entered by Emkay Global Financial Services Ltd. that led to trades valued at 6.5 billion rupees ($126 million) caused the drop, NSE spokeswoman Divya Malik Lahiri said from New Delhi.
The NSE’s systems weren’t at fault, according to the exchange’s Ravi Varanasi, head of business development at the exchange in Mumbai. He said the exchange would investigate “an erroneous quantity in the orders,” of a broker-dealer.
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Pfizer’s U.S. Losses Questioned as International Profit Surges
Pfizer Inc., the world’s biggest drugmaker, was asked by U.S. regulators how it recorded high profit overseas and losses at home when 40 percent of its sales were inside the U.S.
In a May 9 letter filed Oct. 5, Securities and Exchange Commission staff asked New York-based Pfizer to explain why earnings before taxes outside the U.S. were $15 billion in 2011 while losses within the country were $2.2 billion. By piling up profit in low-tax jurisdictions overseas, Pfizer has been able to cut its tax rate reported to investors and boost results.
Pfizer is one of the most aggressive U.S. companies reporting income in countries with lower tax rates than the U.S. as a way of reducing their effective tax rate, according to data compiled by Bloomberg. The drugmaker had the second-highest amount of profit kept overseas, $63 billion, behind only General Electric Co., according to securities filings as of March.
Pfizer is among the companies that have lobbied U.S. lawmakers for a tax holiday that would allow it to bring some of the overseas profit back to the country at a lower tax rate. In its response to regulators, Pfizer wrote that giving more information about how it distributed its earnings among various locations wouldn’t be helpful to investors.
“We conduct business in more than 150 countries and face significant competition from companies located outside the United States, including many competitors located in lower tax jurisdictions,” Joan Campion, a company spokeswoman, said in an e-mail. “At all times and wherever we operate, Pfizer complies with the appropriate tax law.”
Pfizer said in an Aug. 27 letter that it would add more disclosure.
The company is not alone in getting these questions from the SEC. In December, the commission questioned Google about its earnings in other countries.
Florence Harmon, a spokeswoman for the SEC, declined to comment.
IOSCO Oil Probe Asks Price Agencies to Adopt Robust Methods
Companies involved in setting price levels used in the oil market should adopt “robust” controls to protect the reliability of the benchmarks, according to a commission appointed by the Group of 20 nations to investigate possible market manipulation.
The report, which was published Oct. 5 by the International Organization of Securities Commissions, called on price reporting agencies, including Platts, a unit of McGraw-Hill Cos., and Argus Media Ltd., to introduce conflict of interest policies, provide audit trails to regulators and establish a formal complaints process.
IOSCO was appointed by the G-20 in November to investigate the role played by the agencies in oil markets. Platts and Argus publish so-called assessments that are used in pricing shipments of crude and refined products such as diesel.
Masamichi Kono, chairman of the IOSCO Board, said he expects the agencies to adopt the principles globally.
Platts, Argus and ICIS, which is part of Reed Business Information, issued a draft self-regulatory code in April in response to a previous report from IOSCO. The Oct. 5 recommendations are “well aligned with Platts’ current practices,” the company said in an e-mailed statement. Argus didn’t immediately respond to an e-mail seeking comment.
Bloomberg LP, the parent of Bloomberg News, competes with Platts, Argus and ICIS in providing energy markets news and information.
Ex-LinkBrokers Employees Are Charged With Conspiracy, Fraud
U.S. prosecutors charged three brokers with making millions of dollars by lying about the prices of securities they bought and sold for clients.
Marek Leszczynski and Benjamin Chouchane were arrested and appeared in federal court Oct. 5, according to the office of U.S. Attorney Preet Bharara in Manhattan. A third man, Henry Condron, earlier pleaded guilty in the scheme, the government said.
All three men are former employees of the same brokerage firm, which prosecutors didn’t identify. Finra records show the men all worked for LinkBrokers Derivatives Corp., a unit of London-based ICAP Plc.
Separately, the U.S. Securities and Exchange Commission Oct. 5 filed a suit and claimed the three men and a fourth former LinkBrokers employee, Gregory Reyftmann, illegally took $18.7 million from customers by reporting fake execution prices on more than 36,000 transactions over four years.
Guy Taylor, an ICAP spokesman, had no immediate comment on the cases.
The criminal cases are U.S. v. Chouchane, 12-mj-2615; U.S. v. Leszczynski, 12-mj-2614; and U.S. v. Condron; and the SEC case is SEC v. Leszczynski, 12-cv-7488, U.S. District Court, Southern District of New York (Manhattan).
Mendon’s Schutz Says Dodd-Frank ‘Politically Charged’
Anton Schutz, president of Mendon Capital Advisors, discussed banking regulation. Schutz talked with Bloomberg’s Pimm Fox and Courtney Donohoe on Bloomberg Radio’s “Taking Stock.”
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Comings and Goings
Osborne Faces Shrinking BOE Pool as O’Neill Withdraws
George Osborne is about to find out just how many people think they are clever enough to be governor of the Bank of England.
The chancellor of the exchequer will discover today the full list of applicants to replace Mervyn King at the helm of the U.K. central bank, managing monetary policy and banking regulation for a single eight-year term. Candidates had until 8:30 a.m. to express their interest to the Treasury in London.
Bank of England Deputy Governor Paul Tucker’s odds on getting the job narrowed at William Hill Plc today after two potential candidates, Jim O’Neill and Gus O’Donnell, said they didn’t apply. Financial Services Authority Chairman Adair Turner and Independent Commission on Banking Chairman John Vickers are among the other favorites to succeed King when he steps down in June after a decade in the role.
O’Neill, chairman of Goldman Sachs Asset Management, said in an e-mail to Bloomberg News today that he has an “important job” and hadn’t applied. O’Donnell, a former head of the U.K. civil service, said in an interview with the Financial Times that he also wasn’t seeking the post.
The selection panel comprises Treasury Permanent Secretary Nicholas Macpherson, Second Permanent Secretary Tom Scholar and David Lees, chairman of the bank’s court of directors. Lawmakers will also question the new governor before the job commences.
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JPMorgan’s Zubrow to Retire After Getting New Boss Zames
JPMorgan Chase & Co.’s Barry Zubrow will retire at the end of this year.
“Now is the right time in my life” to retire, Zubrow, 59, wrote to colleagues in a note Oct. 5. “We have learned from the mistakes of our recent trading losses.” The note was confirmed by Joe Evangelisti, a spokesman for the New York-based bank.
Zubrow was chief risk officer from November 2007 until January, when he became head of corporate and regulatory affairs. In that role, he lobbied the Federal Reserve and other regulators for looser controls on proprietary traders in the chief investment office.
In a management shuffle in July, JPMorgan Chief Executive Officer Jamie Dimon moved Zubrow from reporting directly to him to reporting to 41-year-old Matt Zames, who was promoted to co-chief operating officer.
Dimon said in a separate memo to staff Oct. 5 that he had benefited from Zubrow’s “thoughtful counsel and analysis.”