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Capital Boost, Bernanke Testimony, Libor: Compliance

July 10 (Bloomberg) -- Capital standards at the biggest U.S. lenders would rise to 5 percent of assets for parent companies and 6 percent for their banking units under a plan proposed yesterday by federal regulators.

The Office of the Comptroller of the Currency proposed a leverage ratio that’s 2 percentage points more than the 3 percent international minimum for holding companies, the agency said in a statement. Capital at U.S.-backed deposit and lending units must be twice the global standard at 6 percent, according to the OCC.

Separately, the five-member Federal Deposit Insurance Corporation board voted 4-1 yesterday for the 3 percent leverage ratio mandated by the international Basel III accord, and unanimously proposed to boost that minimum at eight of the biggest U.S. lenders to 5 percent of assets for parent companies and 6 percent for their banking units.

The U.S. plan goes beyond rules approved in 2010 by the 27-nation Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis that almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of with borrowed money. Bankers say this could force asset sales and pinch profit.

The changes would affect the eight U.S. institutions already tagged as globally important, according to the Federal Reserve. The Financial Stability Board, a group of international central bankers that coordinates financial rules, identified them as JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp.

Based on the largest banks’ September data, the holding companies fell short of the new leverage requirement, according to FDIC staff. The insured lending units would need $89 billion more in capital.

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Compliance Policy

U.S. Derivatives Regulator Weighs Delay in Cross-Border Rule

The U.S. Commodity Futures Trading Commission is considering a six-month phase-in period to implement new rules for overseas swaps trades, according to two people with knowledge of the deliberations.

Regulators face a Friday deadline to resolve a deadlock over how far to expand the regulator’s oversight over trades conducted outside the U.S. by banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc.

CFTC members remain at odds over the regulator’s overseas reach, according to the people, who spoke on condition of anonymity because the deliberations are private. The agency has set a July 12 meeting to vote on the rules; a temporary exemptive order expires on that day.

The international reach of Dodd-Frank Act regulations has been one of the most controversial parts of the government’s effort to reduce risk and increase transparency in the $633 trillion swaps market. The CFTC’s proposed guidelines -- which could extend agency oversight to many trades conducted by overseas U.S. banks or subsidiaries -- have created a rift with foreign regulators, who say their rules are sufficient for regulating derivatives trades in their jurisdictions.

The CFTC’s proposed guidance was criticized by JPMorgan and other U.S. banks for threatening to put them at a competitive disadvantage when they trade overseas.

Swaps trading has been a major source of revenue for large U.S. banks, and some have conducted roughly half of such trades overseas, often through branches or subsidiaries.

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EU to Toughen Creditor-Loss Rules at Failing Banks From August

The European Union will toughen its rules on state support for failing banks from Aug. 1, as it seeks to ensure that private creditors take a hit before taxpayers, and that bailed-out lenders face pay curbs.

The European Commission published today updated bank state-aid guidelines requiring shareholders and junior creditors at a failing bank to face losses before any government funds are given. Rescued lenders would also have to apply a cap on total remuneration as long as they are under restructuring or relying on state support.

Restructuring plans, including a capital-raising plan, to demonstrate long-term profitability would have to be submitted before a bank may tap into recapitalization measures, the EU said.

Still, if financial stability is under threat, state aid for a bank can still be temporarily approved before the full restructuring plan is ready, the EU said. If the viability of the bank can’t be restored, an orderly winding down plan would need to be submitted instead, it said.

Corruption Has Worsened, Transparency International Poll Says

More than half the people surveyed in a Transparency International poll think corruption has gotten worse in the past two years.

The Global Corruption Barometer 2013 poll, released yesterday by the Berlin-based anti-corruption watchdog, surveyed 114,000 people in 107 countries and showed no improvement over previous surveys. Twenty-seven percent of respondents have paid a bribe when accessing public services and institutions in the past 12 months, according to the survey. Two-thirds of those who were asked to pay a bribe refused.

People in 36 countries view police as the most corrupt group and in those countries an average of 53 percent of people had been asked for a bribe by the police, according to the poll results.

Compliance Action

Tokyo Exchange President Expects IPOs to Surge After Cash Merger

Newly appointed Tokyo Stock Exchange Group Inc. President and Chief Executive Officer Akira Kiyota expects initial public offerings to surge this year after the Tokyo and Osaka bourses integrate their cash-equities markets on July 16.

Japan Exchange Group Inc., criticized for trading-system failures in the last two years, doesn’t foresee any technical issues with the cash-market merger, Kiyota said. After looking into whether it’s possible to integrate commodities and equities markets in Japan, the group will seek to increase its overseas operations, he said, citing CME Group Inc., which already offers Nikkei 225 Stock Average futures trading, as a possible partner. The group will also aim to enhance ties with Asian exchanges such as Singapore Exchange Ltd., Kiyota said.

The merged bourse will host the largest equity market outside the U.S. The new structure will make it easier for companies to list, because applications previously had to be submitted separately to Tokyo and Osaka, Kiyota said. Now it can all be done through Tokyo, which will house the TSE first and second sections as well as the Jasdaq, Mothers and Tokyo Pro markets, he said.

The merged bourse will focus on developing its derivatives business to compete with other global markets, he said.

Many obstacles must be overcome before a combined exchange can be created, Kiyota said. These include securing agreements between various regulatory agencies and making sure that Japan’s two commodities exchanges want to merge, he said.

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NYSE Euronext to Take Over Administration of Libor From BBA

Britain will hand over administration of the London interbank offered rate to the operator of the New York Stock Exchange as regulators try to revive confidence in the scandal-hit benchmark.

NYSE Euronext will replace the British Bankers’ Association as Libor’s administrator in early 2014, the London-based lobby group that started the benchmark more than two decades ago said in a statement yesterday. The U.K.’s Financial Conduct Authority began regulating Libor, the benchmark for more than $300 trillion of securities, in April as part of the overhaul.

The New York-based purchaser already operates Liffe, Europe’s second-largest derivatives exchange, which offers derivatives based on Libor. A government review recommended last year that the BBA should be stripped of responsibility for Libor after regulators found banks had tried to manipulate it to profit from bets on derivatives.

The U.K. government formally started the search for a replacement body to set Libor in February after the BBA formally voted to relinquish operation of the benchmark. A seven-member panel recommended the new administrator.

The rate is at present calculated by a poll carried out daily by Thomson Reuters Corp. for the BBA that asks firms to estimate how much it would cost to borrow from each other for different periods and in different currencies. The results, after the application of certain rules, are published for individual currencies before noon in London.

Swipe-Fee Battle Moves to States as U.S. Banks Fight Surcharges

Banks and payment networks are pressing state lawmakers to bar retailers from charging customers more to pay with credit cards than with debit cards or cash.

The laws’ supporters say they are trying to protect consumers from unfair costs when they make purchases with credit cards.

The move for state laws is an extension of a decade-long fight between retailers and members of the payments industry, including JPMorgan Chase & Co., the biggest U.S. credit-card lender, and Visa Inc. and Mastercard Inc., the largest networks, over “swipe” fees for debit and credit cards. Because retailers generally have to pay more to banks when their customers use credit cards than when they buy with debit cards, the banks are trying to prevent stores from steering buyers to debit transactions.

At stake is an estimated $40 billion that banks take in each year from credit-card swipe fees, according to Madeline Aufseeser, a senior analyst with Boston-based consultancy Aite Group LLC.

Banking groups say the push for state laws isn’t a coordinated campaign by the industry. Instead, Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a trade group for card issuers and networks, describes it as an “organic” process of bills arising in states at the same time.

State lawmakers are responding to a class-action settlement that went into effect in January that gives retailers more flexibility to impose surcharges for using different types of cards, Wexler said in an interview before she left her position at the coalition on June 27.

Melissa Cassar, a spokeswoman for Visa, said the company has “no position to share” on the subject of surcharges. In Utah, the state bankers association, which includes JPMorgan, cited the class-action settlement in promoting the law.

Steve O’Halloran, a spokesman for JPMorgan, declined to comment, and a spokesman at Mastercard didn’t respond to requests for comment.

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Courts

‘Fabulous Fab’ E-Mail Shows Tourre’s State of Mind, SEC Argues

Former Goldman Sachs Group Inc. executive Fabrice Tourre sent e-mails in 2007, including one calling himself “Fabulous Fab,” that will help prove he intended to commit fraud, a U.S. Securities and Exchange Commission lawyer told the judge set to oversee Tourre’s trial.

Matthew Martens, the SEC lawyer, told U.S. District Judge Katherine Forrest at a hearing yesterday in Manhattan that the e-mails are necessary to show Tourre’s state of mind.

Martens told Forrest the SEC plans to use the e-mails in its opening statement in the trial, set to begin July 15. Tourre, a former Goldman Sachs vice president, is defending civil claims that he misled investors in Abacus 2007-AC1, a synthetic collateralized debt obligation tied to home mortgages.

The trial comes three years to the day after the SEC announced Goldman Sachs’s agreement to pay a $550 million settlement, which was a record at the time, and admit mistakes in marketing Abacus. Since the settlement, Tourre has stood alone against SEC allegations in the case.

In one, Tourre called himself “Fabulous Fab,” citing a friend’s nickname for him. Among the e-mails, in which Tourre writes in French and English, he describes derivative products as “complex, highly leveraged, exotic trades” and states he created them “without necessarily understanding all of the implications of those monstruosities!!!”

John “Sean” Coffey, a lawyer for Tourre, argued yesterday that the e-mails, which Tourre sent to his girlfriend in London, were personal and have nothing to do with the issues in the trial.

The argument over Tourre’s e-mails came in the final court conference before trial. Forrest didn’t issue a decision at the hearing. Both sides told Forrest they expect the trial to take three weeks.

The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).

Bernanke Needn’t Testify in AIG Bailout Suit, U.S. Says

U.S. Federal Reserve Chairman Ben Bernanke shouldn’t be compelled to testify in Maurice “Hank” Greenberg’s lawsuit over the government’s bailout of American International Group Inc., the Justice Department said.

Starr International Co., Greenberg’s closely held investment firm and an AIG shareholder, hasn’t shown the “extraordinary circumstances” needed to warrant the testimony because information on Bernanke’s role in the 2008 bailout can be obtained from other sources, the U.S. argued in a filing in the U.S. Court of Federal Claims in Washington.

Starr sued the government for $25 billion in 2011. Greenberg called the assumption of 80 percent of the AIG’s stock by the Federal Reserve Bank of New York in September 2008 a taking of property in violation of shareholders’ constitutional rights.

The AIG board on Jan. 9 declined to join the suit. A trial has been set for Sept. 29, 2014.

David Boies, a lawyer for Starr at Boies, Schiller & Flexner LLP, said in an e-mail that Bernanke “has important testimony” to give in this case. He said Starr will respond in court to the U.S. filing within the next couple of weeks.

The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).

Ex-SAC Trader Martoma Seeks Dismissal of Charges Related to Elan

Former SAC Capital Advisors LP portfolio manager Mathew Martoma urged a federal judge to dismiss two insider trading charges tied to his firm’s sales of Dublin-based Elan Corp.’s American depositary receipts.

Martoma, who’s charged with the biggest insider trading scheme in U.S. history, cited a U.S. Supreme Court ruling in 2010, called Morrison v. National Australia Bank, that said U.S. laws don’t protect foreign investors who buy stocks on overseas exchanges.

He was charged by the U.S. in November, accused of helping the hedge fund founded by Steven A. Cohen make $276 million using illegal tips about a drug to treat Alzheimer’s disease. The U.S. alleged that after getting a tip from a neurologist who was head of the safety monitoring committee for the drug trial, Martoma traded on Elan ADRs and shares of Wyeth LLC. Martoma has denied wrongdoing and is scheduled to go on trial in November.

Martoma’s lawyer said that while he isn’t seeking dismissal of a charge tied to trading in Wyeth LLC, a Delaware corporation based in Madison, New Jersey, he reserves the right to do so later.

The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net.

To contact the editor responsible for this report: Michael Hytha at mhytha@bloomberg.net.

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