Oct. 1 (Bloomberg) -- The fate of the Dodd-Frank Act’s ban on banks trading for their own accounts -- one of the final pieces of the U.S. effort to prevent a repeat of the 2008 financial crisis -- may rest with a cluster of economists at the Securities and Exchange Commission.
The agency’s 50 economists are attempting to calculate the costs and benefits of the so-called Volcker rule, a linchpin of the financial overhaul that would curb the kind of high-stakes proprietary trading that could lead to crippling losses or bailouts at banks like JPMorgan Chase & Co. or Citigroup Inc.
Court challenges that overturned other Dodd-Frank regulations because of faulty cost-benefit analysis have increased pressure on the SEC economists, led by Craig M. Lewis, a veteran finance professor on leave from Vanderbilt University. Their work may determine whether the rule could withstand a similar lawsuit -- an option banks and trade groups say is under consideration.
The economists are racing the clock: Regulators are under pressure from President Barack Obama and Treasury Secretary Jacob J. Lew to finish the rule in the next three months. At a recent meeting, Lew gave the heads of the five agencies drafting the rule a series of deadlines designed to make sure the government meets the year-end target, according to a person briefed on the meeting who asked not to be identified because it wasn’t public.
The agencies -- the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Commodity Futures Trading Commission and SEC -- have reached agreement on key issues, including the definitions of activities like market-making and portfolio hedging, and are now working on the final text, according to three people familiar with the process who declined to provide details.
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Barnier Presses Gensler for Five-Month U.S. Swap-Platform Delay
U.S. derivatives regulators should grant a more than five-month delay in registration requirements for European swap-trading platforms to avoid disruptions in the $633 trillion global market, said Michel Barnier, the European Union’s financial services chief.
The U.S. Commodity Futures Trading Commission, which is requiring swap-execution facilities to register by Oct. 2, should grant an extension to March 14 so the U.S. and Europe can reach a broader agreement on how to apply their respective rules to cross-border trades, Barnier said in a letter to Gensler dated yesterday.
The CFTC is overseeing the new platforms as part of an effort required under the 2010 Dodd-Frank Act to bring greater competition and transparency to swaps traded by firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc. Largely unregulated trades helped fuel the 2008 credit crisis and led to the $182.5 billion taxpayer-rescue of insurer American International Group Inc.
Gary Gensler, CFTC chairman, has held firm on the Oct. 2 deadline, while the agency has granted temporary delays related to data-reporting and enforcement responsibilities of swap-execution facilities, or Sefs. Three partial delays were announced on Sept. 27.
A Sef proposed by Bloomberg News parent Bloomberg LP is among venues -- including those from IntercontinentalExchange Inc., MarketAxess Holdings Inc. and Javelin Capital Markets LLC -- that have won temporary approval from the CFTC, according to the regulator’s website.
Financial lobbying groups also have pressed the CFTC to grant delays in the requirements.
China Watchdog Embraces Risk After Everbright Fat Finger
China’s securities watchdog is forging ahead with rules that allow brokers to invest in complex financial products and enter risky new businesses even after an unprecedented $3.8 billion trading error roiled markets.
In the past six weeks, the China Securities Regulatory Commission ended an 18-year hiatus on trading of treasury bond futures and said it would let more brokerages borrow stock for short selling. Those measures were disclosed after misplaced bets caused by faulty software at Everbright Securities Co. on Aug. 16 caused the wildest swings in Shanghai shares since 2009.
Policy makers in China, seeking to improve allocation of capital, have since 2008 permitted brokerages including Shanghai-based Everbright to offer clients short selling and margin trading, as well as betting on derivatives with their own funds. While the state-controlled brokerage has now been suspended from most proprietary trading, CSRC Chairman Xiao Gang shows no loss of appetite for risk taking.
Press officials for the CSRC didn’t reply to questions faxed to their Beijing office seeking comment. Everbright didn’t respond to questions sent to its Shanghai office. China’s securities watchdog has pledged to scrutinize risk controls among the nation’s brokerages. The regulator said on Aug. 30 that it was setting up special groups to study ways to improve oversight of the securities industry.
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Switzerland and U.S. Agree to Delay FATCA Implementation
The U.S. Foreign Account Tax Compliance Act is to be implemented from July 1, 2014, instead of Jan. 1, 2014, the Swiss government said in statement yesterday.
The law is designed to curb tax evasion by Americans abroad. The Swiss said the new deadline is in line with that of other countries. Parliament approved the changes Sept. 27.
The FATCA agreement can be challenged in an optional referendum, according to the statement.
Earlier, the U.S. Internal Revenue Service on July 12 gave overseas banks a six-month delay to Jan. 1, 2014, to begin compliance with FACTA, the Treasury Department said at that time.
The July 12 extension of the act followed a previous one-year delay.
U.S. Oversight of Financial Markets to Continue During Shutdown
U.S. oversight of financial markets and institutions will operate largely as usual in the wake of the partial federal government shutdown because most regulators are funded with independent revenue.
An exception is the Commodity Futures Trading Commission, the top U.S. derivatives overseer, which relies on congressional appropriations to pay for surveillance of markets for derivatives tied to oil, natural gas and interest rates, among other products.
Hundreds of CFTC employees pursuing enforcement investigations, legislative affairs and implementing Dodd-Frank Act regulations are expected to be furloughed, according to planning documents for the shutdown. The agency’s four sitting commissioners are exempted.
The Securities and Exchange Commission, also reliant on appropriations, has enough carryover funding to remain open for “a few weeks,” according to planning for the shutdown, SEC spokesman John Nester said yesterday. Activities such as enforcement investigations, company filings and investor disclosures, and market surveillance are expected to continue.
David M. Lynn, a former chief counsel of the SEC’s corporation finance division, said the regulator’s functions weren’t affected by the last government shutdown, in late 1995 and early 1996.
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Separately, the chief executives of large banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are expected to meet with President Barack Obama today to discuss the government shutdown and budget stalemate in Washington.
The White House visit, confirmed by three people familiar with the schedule, was set up by the Financial Services Forum, a trade group representing the CEOs of the 19 largest banking and insurance firms. The executives are also set to meet with Treasury Secretary Jacob J. Lew and several lawmakers.
The CEOs plan to discuss the White House’s negotiations with Congress over funding the government and raising the U.S. debt ceiling, said the people, who spoke on condition of anonymity because details of the meeting were still being worked out.
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Bank Secrets Exposed in EU’s Credit Derivatives Antitrust Probe
European Union regulators inadvertently sent confidential data to 13 of the world’s biggest lenders as part of an antitrust complaint in an investigation of the credit derivatives industry.
The European Commission said sensitive information was accidentally left in the documents by law firms representing companies in the probe. After the revelation was discovered, recipients including Goldman Sachs Group Inc. and JPMorgan Chase & Co. were told they must promise to destroy the information without reading it.
The credit-default swaps probe, which includes HSBC Holdings Plc and Deutsche Bank AG, is one of two priority EU investigations into financial institutions. The commission, in a July statement of objections, accused the banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association of working together to prevent Deutsche Boerse AG and the Chicago Mercantile Exchange from entering the credit-derivatives business from 2006 to 2009.
ISDA was a late addition to the probe, with the regulator only announcing its inclusion in March.
Recipients of antitrust complaints have a right to see evidence underpinning the regulator’s case. Typically this is collated and sent in a DVD by the commission.
The information malfunction came as part of this process giving recipients access to the probe file, said Antoine Colombani, a spokesman for Joaquin Almunia, the EU’s antitrust chief. He didn’t identify what data was revealed or companies involved.
Officials at all of the banks in the probe, as well as ISDA, declined to comment on the disclosure. Markit didn’t immediately respond to a call and an e-mail.
Bloomberg LP, the parent of Bloomberg News, competes with Markit in selling information to the financial-services industry.
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Banks Face Basel Debt Rule Capturing Off-Balance Sheet Risks
Banks are set to face a broad international leverage limit that will catch off-balance sheet risks and prevent them from hiding their debt, according to the head of the Basel Committee on Banking Supervision.
The Basel group is seeking to put a ceiling on indebtedness that will prove robust no matter how complicated a bank’s business model, Stefan Ingves, its chairman, said in an interview.
Ingves is also governor of Sweden’s central bank.
A quarter of large global banks would have failed to meet a draft version of the Basel leverage rule had the standard been in force at the end of last year, according to data published by the Basel committee on Sept. 25. Concerns that banks can reduce their capital requirements by simply changing how they measure the risk of losses on their assets have prompted calls from some supervisors for more reliance on leverage limits, on the grounds that they are harder for lenders to game.
The group, which brings together regulators from 27 nations including the U.S., U.K. and China, is in “a good position” to complete work on the leverage ratio rule “toward the end of the year or sometime early next year,” Ingves said.
Under the committee’s timetable, banks will be expected to publish how well they measure up to the rule from Jan. 1, 2015, with the measure to become binding in 2018.
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JPMorgan Fund Joins Tax Lawsuits Seen Costing U.K. $1.6 Billion
U.K. tax officials may have to pay out 1 billion pounds ($1.62 billion) to about 100 investment funds -- including some run by JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc -- suing for the return of overpaid taxes dating back two decades.
Her Majesty’s Revenue & Customs won’t disclose what it may owe the funds in lawsuits stemming from a 2007 European Court ruling that investment trusts were improperly charged value-added tax on management fees. Marc Welby, a partner at accounting firm BDO LLP, estimated the agency might have to refund about 1 billion pounds.
About 120 investment trusts, including others operated by BlackRock Inc., Schroders Plc and Investec Plc, have sued HMRC since May 2012, according to court filings that didn’t show the reason for the suits. Two people familiar with the actions said at least 100 of them are related to overpaid VAT.
HMRC has denied two Freedom of Information requests by Bloomberg News seeking a figure for how much the U.K. may have to repay if the suits are successful.
VAT is a tax charged on goods and services provided in the U.K. A European Union Court of Justice ruling in 2007 found that services provided by fund managers to investment trusts were exempt, meaning VAT shouldn’t have been charged. The VAT was charged to trusts by managers, who then paid tax to HMRC.
It’s difficult to determine the U.K.’s liability in the lawsuits because they deal with different time periods and several types of funds, including closed-end investment trusts, venture capital trusts and pension funds.
The suits are complicated by the way VAT is collected. Investment managers charged VAT to the funds in their fees, and that money was eventually collected by the government. The funds are challenging several factors including whether they can sue HMRC directly, and which time periods going back to the 1990s are eligible for refunds. Any payouts would ultimately benefit investors in the funds, according to Welby.
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Rohatyn’s CapAsia CEO Bastin Sued for Defamation in Singapore
CapAsia’s founding Chief Executive Officer Vijay Sethu sued Johan Bastin, his successor at the Rohatyn Group-owned private equity firm in Singapore, claiming Bastin impugned him by suggesting he was front-running a deal.
Sethu is seeking unspecified damages for defamation and a restraining order against Bastin to stop him from making any further disparaging comments, according to a lawsuit filed in Singapore High Court. Bastin has denied the allegations.
“Our client’s position is that the lawsuit is entirely without merit,” Bastin’s lawyers Hri Kumar and Shivani Retnam said in an e-mail.
Bastin, who replaced Sethu as CEO in 2009, said in his defense filing that the lawsuit was filed with the motive of harassment.
“My client is very confident in the Singapore legal system and that the merits of his case will be proved at trial,” Sethu’s lawyer Edmund Kronenburg said.
Sethu, after being replaced as CEO, remained at CapAsia as the head of one of its funds and later as a consultant before leaving in November.
CapAsia manages $400 million in assets across three funds, according to its website. The firm is owned by New York-based Rohatyn, an emerging markets asset manager founded by former JPMorgan Chase & Co. bankers, and Malaysia’s CIMB Group Holdings Bhd.
The case is Sethu v. Bastin, S612/2013, Singapore High Court.
Algorithmic Trading on Commodities Futures Seen Doubling by Man
Algorithmic trading for electronic commodities futures doubled from about 20 percent to 40 percent in the past two years, Scott Kerson, head of a commodities unit at Man Group Plc, said in a presentation for the London Bullion Market Association conference in Rome yesterday.
There is a “reasonable” chance that will double again in next few years, he said. Kerson heads commodities at Man Systematic Strategies and AHL.
U.S.-EU Derivatives Spat Not Part of Trade Talks, Froman Says
U.S. Trade Representative Michael Froman said negotiations with the European Union on derivatives regulation are taking place outside the context of talks on a transatlantic free-trade agreement.
EU financial-services chief Michel Barnier said on Sept. 13 that the U.S. needs to ease the burden its new rules will place on European firms. Froman told reporters in Brussels yesterday that the negotiations involve the European Commission, the U.S. Commodity Futures Trading Commission and the International Organization of Securities Commissions.
Froman said the U.S.-EU trade talks would include financial services in the context of market access. While declining to give specific examples on issues, he said that derivatives rules would be handled “in parallel and on the side of the negotiations” via two-party and global discussions.
Obamacare Needs to Be ‘Refined Over Time,’ Lesser Says
Richard Lesser, president and chief executive officer at Boston Consulting Group Inc., talked about the outlook for implementation of the Affordable Care Act and federal budget negotiations.
Lesser spoke with Tom Keene, Sara Eisen, Matthew Dowd and Scarlet Fu on Bloomberg Television’s “Surveillance.”
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Sweden Says Banks Shouldn’t Grow at Faster Pace Than Economy
Sweden’s efforts to reduce bank system risk should also ensure the industry doesn’t grow at a faster pace than the economy, Financial Markets Minister Peter Norman said.
“The dream scenario would be that the economy grows a little bit faster than the bank sector,” Norman said yesterday in an interview in Stockholm.
The government of Prime Minister Fredrik Reinfeldt has told its four biggest banks to hold larger capital buffers than those set elsewhere in Europe in an effort to protect taxpayers from financial industry risk.
Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB must hold at least 12 percent core Tier 1 capital of their risk-weighted assets by 2015. The Basel Committee on Banking Supervision sets a 7 percent floor and a 2019 deadline.
Separately, The European Banking Authority needs more resources to keep up with its workload, Andrea Enria, its chairman, said in prepared remarks on the agency’s website.
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