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‘Too-Big’ Insurers, Loss Absorbency, SAC: Compliance

Updated on

Aug. 13 (Bloomberg) -- The Financial Stability Board said an extended version of its guidance on the resolution of systemically important banks will apply to non-bank financial institutions, such as Allianz SE and other large insurers.

The Basel, Switzerland-based body set up by the Group of 20 nations has developed “annexes” to its advice for local regulators of financial institutions that aren’t lenders, according to an e-mailed statement yesterday. The FSB asked for responses from market participants by Oct. 15.

The FSB, led by Bank of England Governor Mark Carney, is coordinating the global regulatory response to the worst financial crisis since the Great Depression to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and bailout of American International Group Inc.

Last month, the FSB published a list of nine too-big-to-fail insurers, including Allianz, American International Group Inc., MetLife Inc., Prudential Financial Inc. and Axa SA.

The FSB “set out the core elements considered necessary to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to losses,” it said yesterday.

Compliance Policy

U.S. Watchdog to Propose Greater Disclosure in Auditors’ Reports

Auditors could be required to better explain how they graded a company’s financial statements under a proposal that would trigger the first change in 70 years to how auditors report their findings.

The Public Company Accounting Oversight Board is scheduled to vote today on a plan meant to amplify the information investors receive from the auditor’s report. The PCAOB has studied ways to overhaul such reports since the 2008 financial crisis.

The PCAOB has said it could seek to force auditors to provide a supplemental report explaining their findings. Alternately, the board said it could seek to make audit firms provide a few sentences highlighting the most critical parts of the financial statements.

The board’s vote will open a period of public comment during which audit firms, public companies and investors lobby to shape a final standard, which would have to be approved by the Securities and Exchange Commission. The PCAOB was created by the Sarbanes-Oxley Act of 2002 and sets standards for auditors of U.S.-registered firms.

Some investors have pushed for more specific information about an auditor’s findings, which are disclosed in a brief, one-page opinion that states whether a company passed or failed the audit. Groups such as the Council of Institutional Investors support requiring auditors to provide a separate narrative that explains the company’s accounting judgments and estimates.

The largest accounting firms, represented by the Center for Audit Quality, have pressed the PCAOB to maintain the current reporting model while better explaining the roles of audit firms and management in preparing financial statements.

Instead of a separate narrative, the PCAOB could propose a requirement to use “emphasis paragraphs,” or disclosures of judgments behind accounting estimates and areas with measurement uncertainty.

Derivatives Margin Losses Could Help Save CCPs, Regulators Say

Derivatives traders should be prepared to lose the initial margin they post at clearinghouses if it’s needed to prevent a financial crisis, global markets regulators said.

The “margin is likely to constitute a very large pool of assets which would, if it can be used, provide a high degree of loss-absorbency” to help stabilize a central counterparty, or CCP, the International Organization of Securities Commissions and the Committee on Payment and Settlement Systems said in a joint report published yesterday.

The committee is part of the Bank for International Settlements.

The Group of 20 nations has ordered a global overhaul of rules governing derivatives contracts, mandating the use of CCPs by traders. Regulators have sought tougher rules for over-the-counter derivatives since the collapse of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest traders of credit-default swaps.

Clearinghouses such as London’s LCH.Clearnet Ltd. and Eurex Clearing AG operate as central counterparties for every buy and sell order executed by their members, who are required to post collateral, reducing the risk that a trader defaults on a deal.

Madrid-based Iosco brings together national market regulators from more than 100 countries to coordinate rules and share information.

CIRC Head to Expand Scope of Insurers’ Investments, Caixin Says

The China Insurance Regulatory Commission will expand the industries in which insurers may invest as debt holders, Caixin’s New Century magazine reported, citing an interview with Xiang Junbo, head of the commission.

CIRC is studying how to set up a fund for insurers to invest in small companies, Xiang said, according to the Caixin report. Investments by insurers in local government financing vehicles are currently less than 200b yuan, Xiang said in the magazine interview.

The commission is also studying new rules to govern Internet insurance operations, Xiang said, according the magazine.

Compliance Action

U.S. Regulator Subpoenas Banks Over Long Warehouse Queues

The top U.S. derivatives regulator subpoenaed Goldman Sachs Group Inc. and JPMorgan Chase & Co. for documents relating to their warehouses for aluminum and other metals, according to two people with knowledge of the probe.

The Commodity Futures Trading Commission has requested documents dating to the start of 2010 about the banks’ commodity warehouses, according to the people, who asked not to be named because the subpoenas are private. Glencore Xstrata Plc, which owns warehousing business Pacorini, also received a subpoena, another person said.

MillerCoors LLC, Encore Wire Corp. and other metal users have complained about long queues and artificially high prices at the warehouses, particularly for copper and aluminum.

Dennis Holden, a CFTC spokesman, declined to comment on the subpoenas.

The subpoena to Goldman was also sent to its Metro International Trade Services unit, which stores aluminum, copper and other metals as part of the London Metal Exchange system. JPMorgan owns Henry Bath & Son Ltd., a founding member of the LME and a warehouse operator. Glencore, the biggest publicly traded raw-materials supplier, is one of the largest owners of warehouses monitored by the LME as lawmakers and regulators increase scrutiny.

Global aluminum costs were inflated by $3 billion in the past year through unfair rules that allow warehouse owners to slow deliveries, Tim Weiner, a global risk manager at Chicago-based brewer MillerCoors, said in written testimony before his July 23 appearance at a U.S. Senate hearing.

Senator Sherrod Brown, an Ohio Democrat, said he plans to hold additional congressional hearings on banks’ ownership of mines, pipelines, tankers and warehouses.

London Whale Resurfaces to Help U.S. With JPMorgan Trading Probe

Bruno Iksil, the former JPMorgan Chase & Co. trader whose bets caused more than $6.2 billion in losses last year, is now central to any U.S. charges against his former colleagues.

Iksil, the Frenchman who became known as the London Whale because of his trading book’s size, has been cooperating with the Federal Bureau of Investigation and the Manhattan U.S. Attorney’s Office for months in their probe of the New York-based bank’s biggest trading debacle ever, said three people with direct knowledge with the matter. Iksil won’t face charges as long as he cooperates and testifies, the people said.

Prosecutors may announce charges as early as this week against former London-based JPMorgan employees, accusing them of trying to mask losses on a complex derivatives portfolio, said another person who asked not to be named because the investigation isn’t public. The episode has already sparked a Senate subcommittee hearing and prompted JPMorgan’s board to cut Chief Executive Officer Jamie Dimon’s pay in half.

It still isn’t clear who may be charged, the person said. Prosecutors also are weighing penalties for the bank, including a fine and reprimand, the newspaper said in a subsequent report.

Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, and Peter Donald at the FBI’s New York office declined to comment on the investigation.

For more, click here.

Deutsche Bank Said to Face Bafin Call Over Libor Rigging

Deutsche Bank AG may be told as soon as this month by the German financial regulator to improve its controls to prevent a repeat of attempts to manipulate benchmark interest rates, according to a person familiar with the matter.

Bafin is finalizing its first report into the rigging of Libor and similar benchmarks and will submit it to the Frankfurt-based lender as soon as this month, said the person, who asked not to be identified because the review isn’t public. Bafin will present its findings to Deutsche Bank management, telling them to adhere to standards set by the regulator, the person said.

The report is part of a broader investigation by Bafin into allegations that traders at Deutsche Bank tried to manipulate rates. Under its rules, Bafin cannot publish the findings or disclose actions it takes on individual banks without the lender’s consent. The regulator will oversee how the measures are implemented.

The move may bring the bank closer to facing fines from U.S., U.K. and EU regulators, who are waiting on the German watchdog to finish their reviews. Barclays Plc, UBS AG and Royal Bank of Scotland Group Plc have paid a total of about $2.5 billion in fines for colluding to rig benchmark interest rates for profit or to mask their true cost of borrowing.

Bafin is in the final stages of reviewing the report, compiled by the Bundesbank, Germany’s central bank, on whether Deutsche Bank’s systems and controls failed to prevent traders from trying to manipulate rates to benefit their own trades, the person said.

Bafin’s press office declined to comment.

Christian Streckert, a spokesman for Deutsche Bank, declined to comment on the report. He said the bank is cooperating with regulatory investigations and conducting its own review into the allegations.

“As per the current status of investigations, we can say that no current or former member of the management board had any inappropriate involvement in the interbank offered rates matters under review,” Streckert said. The bank “has also found that certain employees, acting on their own initiative, engaged in conduct that falls short of the bank’s standards, and action has been taken accordingly.”

Bafin has also commissioned an auditor to look into possible wrongdoing by Deutsche Bank staff and management.

Finra Said to Look Into Analyst Participation in IPO Pitches

Wall Street’s self-regulator is looking into whether research analysts are participating in pitches to win business underwriting initial public offerings, according to a person familiar with the matter.

The Financial Industry Regulatory Authority has requested information from several firms, said the person, who asked not to be identified because the probe may not result in a formal investigation. The person didn’t say which firms were queried.

Since the dot-com bust a decade ago, investment bankers have been restricted from arranging communications between analysts, who provide recommendations to investors, and the companies they seek business from. The JOBS Act, passed last year, loosens those regulations when banks are dealing with companies with less than $1 billion in annual revenue.

The rules were imposed in 2003 by regulators and by a settlement between then-New York Attorney General Eliot Spitzer and 10 firms including Goldman Sachs Group Inc. and JPMorgan Chase & Co. Spitzer forced the banks to change their practices after his office obtained internal e-mails from Merrill Lynch & Co. analysts who privately called dot-com stocks they had recommended “dogs” and “crap.”

The New York Times reported the Finra inquiry Aug. 11.

Interviews

Holland Says ‘Momentum Is Behind’ JPMorgan, Citigroup

Michael Holland, chairman of Holland & Co., talked about JPMorgan Chase & Co., the outlook for the banking industry and investment strategy.

Holland spoke with Sara Eisen, Scarlet Fu and Tom Keene on Bloomberg Television’s “Surveillance.”

For the video, click here.

Levitt Says Dodd-Frank Must Be Primary Focus of SEC

Arthur Levitt, former chairman of the Securities and Exchange Commission, said the “number one priority” of the agency must be implementation of the Dodd-Frank Act. Levitt talked with Bloomberg’s Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

For the audio, click here.

Comings and Goings

SAC Parameter Trading Unit Said to Close Amid Insider Probe

SAC Capital Advisors LP, the hedge-fund firm that’s facing federal insider-trading charges and a money-laundering lawsuit, shuttered one of its trading units, according to a person with knowledge of the matter.

Parameter Capital, which was started by Anil Stevens and Glenn Shapiro three years ago to trade financial stocks, managed about $300 million, said the person, who asked not to be named because the information is private. Stevens, 41, plans to start his own firm and take as many as nine people with him, the person said. Shapiro won’t be joining Stevens in his new venture, the person said.

Stevens and Shapiro couldn’t immediately be reached for comment. Reuters yesterday reported the closing of Parameter.

SAC Capital, run by billionaire Steven A. Cohen, was granted court approval last week to continue operating until the insider-trader cases are resolved. SAC, based in Stamford, Connecticut, was accused by the U.S. government in an indictment announced July 25 of engaging in an insider-trading scheme over more than a decade.

The Parameter unit was based in New York and started in 2010 with 12 employees. Stevens and Shapiro rejoined SAC at that time after working at Chicago-based hedge-fund firm Balyasny Asset Management LP.

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

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

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