Nov. 19 (Bloomberg) -- The largest Wall Street banks are mobilizing to fight a new policy by the U.S. Commodity Futures Trading Commission that gives the regulator broader authority in overseas derivatives deals.
The policy, issued Nov. 14, negates a legal interpretation that banks have been using to keep some swaps trades off electronic platforms and away from CFTC rules enacted to make the market less opaque. The firms and their lawyers say the announcement, which the agency published as a “staff advisory,” is written so broadly it could expose their overseas deals to even more U.S. regulation.
Within hours of its release, bank lobbyists met to discuss possible legal action against the agency and began contacting members of Congress, according to people involved in the pushback. The next day, CFTC Chairman Gary Gensler was getting letters from lawmakers saying he was upsetting the $693 trillion market by issuing policy with little consultation.
The question of how to apply U.S. derivatives rules in foreign jurisdictions has been debated since the Dodd-Frank regulatory overhaul began to take shape. The biggest banks sometimes trade half their swaps with overseas clients. Gensler has fought to extend his agency’s reach.
He defended the policy in New York yesterday at an industry conference held by swap execution facilities, the new platforms where most swaps are supposed to trade. Gensler said the policy ensures equal treatment for market players.
The advisory has also reopened a rift between the CFTC and European regulators. In July, Gensler had reached an agreement with his counterparts to defer to foreign authorities when the CFTC finds their rules to be comparable -- a deal seen as benefiting the largest banks.
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JPMorgan Said to Agree to Final Details of $13 Billion Accord
JPMorgan Chase & Co. has resolved the last obstacles to a record $13 billion settlement of civil state and U.S. probes over the sale of mortgage bonds, clearing the way for a deal today after months of negotiations, two people briefed on the matter said.
The accord includes a previously disclosed $4 billion settlement to end a 2011 Federal Housing Finance Agency lawsuit, said one of the people, who asked not to be identified because the discussions are private.
While the deal would mark the largest amount paid by a financial firm in a settlement with the U.S., the Justice Department is still probing JPMorgan’s recruiting practices in Asia, energy trading and its relationship with Ponzi scheme operator Bernard Madoff. The New York-based bank has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover legal costs.
JPMorgan agreed to drop litigation against the Federal Deposit Insurance Corp. related to some bonds sold by Washington Mutual Inc., the people said. The bank battled with the FDIC over who should pay some liabilities from the failed Seattle thrift that the agency placed into receivership in 2008 while selling assets to JPMorgan. The deal doesn’t resolve a criminal probe led by the U.S. Attorney’s office in Sacramento, California, into the company’s mortgage-bond sales.
JPMorgan, led by Chief Executive Officer Jamie Dimon, announced a tentative $4.5 billion deal last week with 21 institutional investors, including Pacific Investment Management Co., to settle separate claims that the lender and its subsidiaries sold faulty mortgage bonds. The bank may seek reimbursement from the FDIC for claims against WaMu from those investors, two people familiar with the matter said.
Andrew Gray, a spokesman for the FDIC, JPMorgan’s Brian Marchiony and Brian Fallon at the Justice Department said they couldn’t comment because the negotiations are confidential.
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U.K. Said to Investigate Traders’ Personal Currency Dealing
British regulators expanded their probe into the manipulation of global currency markets by asking banks to examine foreign-exchange traders’ personal transactions, said a person with knowledge of the matter.
The Financial Conduct Authority is focusing on “personal account dealing” by traders who may have placed bets for their own benefit based on knowledge of customer currency orders, said the person, who asked not to be identified because the request hasn’t been made public.
Regulators in the U.K., Switzerland, the U.S. and Asia are probing the $5.3 trillion-a-day foreign-exchange market after Bloomberg News reported possible misconduct in June. Dealers said they had been front-running client orders and trying to rig the benchmark WM/Reuters rates by colluding with counterparts and pushing through trades before and during the 60-second windows when the figures are set, Bloomberg reported.
Britain’s markets regulator asked traders to come in for interviews in recent weeks, two people with knowledge of the inquiry said last week.
Officials at the London-based FCA declined to comment on the investigations. The probe of personal trading was reported earlier by the Financial Times.
Rabobank Said to Avoid EU Libor Fine After Collusion Bids
Rabobank Groep, the Dutch lender fined 774 million euros ($1.04 billion) by U.S., U.K. and Netherlands regulators for rigging interbank lending rates, will escape a European Union antitrust fine this year, two people familiar with the probe said.
Rabobank isn’t among a group of lenders settling a case over manipulation of yen Libor and will avoid punishment at this stage, said the people, who asked not to be identified because the EU’s decision isn’t yet public. More than half a dozen banks are set to be fined as part of a settlement with the EU in the yen Libor case, one of the people said.
Rabobank made as many as 384 internal attempts to rig yen Libor, the U.K.’s Financial Conduct Authority said last month. As part of a “collusive effort” to manipulate rates, staff also sent at least 10 requests outside the bank and received seven from others, the FCA said.
Antitrust regulators have “a harder case to make” than financial watchdogs because they need to show a conspiracy between traders, said Robert Fleishman, a lawyer at Steptoe & Johnson LLP in Brussels.
The Dutch lender declined to comment on whether it would be fined by the Brussels-based commission. Antoine Colombani, a spokesman for the EU regulator, also declined to comment.
Avoiding punishment in the first wave of fines doesn’t mean the bank is immune from future penalties if the EU antitrust arm decides to revisit the dossier, said one of the people.
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Iceland Tells Hedge Funds Not to Bet on 75% Claims Writedown
Iceland’s government says speculation by creditors in the island’s failed banks, many of which are hedge funds, that they will need to take a 75 percent writedown on their claims is an exaggeration.
Creditors in Iceland’s failed banks are trying to reach an agreement with the island’s authorities on how to treat $3.8 billion in krona-denominated claims without triggering a currency slump. Iceland has said it won’t lift capital controls unless creditors accept writedowns as the nation tries to avoid a balance of payments crisis.
The government, elected in April after promising to help households through debt relief, estimates it will be able to unwind capital controls in place since 2008 within six months of striking a deal with creditors.
A number of the creditors waiting to get their money back are hedge funds that had bet on a faster resolution of Iceland’s banks. Firms including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP, bought claims on lenders’ assets at prices well below face value.
Though most creditors have yet to be repaid, Iceland’s crisis management program has won international praise and the $14 billion economy is now growing faster than the euro area.
MF Global Brokerage to Pay $100 Million Fine in CFTC Case
MF Global Holdings Ltd.’s brokerage unit was fined $100 million and forced to admit to allegations in a lawsuit filed by the U.S. Commodity Futures Trading Commission over customer losses sustained in the company’s 2011 failure.
U.S. District Judge Victor Marrero in Manhattan on Nov. 8 signed a consent order for the fine, to be paid after MF Global Inc. fully recompenses customers and certain other creditors. The penalty is part of a June settlement under which the company agreed to pay about $1 billion in compensation to customers. About 90 percent of that money has already been distributed.
The judge yesterday directed MF Global to pay about $290 million of the judgment to a federal bankruptcy trustee within five business days.
The CFTC sued MF Global and company officials including former Chief Executive Officer Jon Corzine in June for failing to properly supervise employees as the firm spiraled toward bankruptcy in 2011. The day the suit was announced, the agency said it had a settlement with the brokerage unit, MF Global Inc., to pay about $1 billion in restitution to clients and the $100 million penalty.
“Judge Marrero’s action is procedural and confirms one of the bases for the MF Global Inc. trustee’s recent motion and the bankruptcy court’s order granting authority to make 100 percent distributions to former commodity customers,” Kent Jarrell, a spokesman for the MF Global brokerage trustee, James Giddens, said in a statement. “The trustee intends go forward with the distributions subject to possible appeals.”
The Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.
Calvery, Raman, Murck Testify About Virtual Currencies
The U.S. Treasury Department’s Jennifer Calvery, the Justice Department’s Mythili Raman and the Department of Homeland Security’s Edward Lowery testified before the Senate Committee on Homeland Security and Government Affairs in Washington about virtual currencies.
The International Centre for Missing & Exploited Children’s Ernie Allen, Bitcoin Foundation Inc.’s Patrick Murck, Circle Internet Financial Inc.’s Jeremy Allaire and George Mason University’s Jerry Brito also testified.
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Levitt Sees No Wrong in Geithner Joining Warburg Pincus
Arthur Levitt, former Securities and Exchange Commission chairman, said “there is nothing wrong” with former Treasury Secretary Timothy Geithner starting a career on Wall Street.
Levitt talked with Bloomberg’s Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance.”
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Clegg Presses Case for Higher U.K. Property Tax on Foreigners
U.K. Deputy Prime Minister Nick Clegg pushed the case for raising the tax on top-end properties owned by foreign investors in London, as the government examines the idea in the run-up to its end-of-year financial statement.
Clegg made the remarks at a news conference in London yesterday.
Chancellor of the Exchequer George Osborne is considering levying capital gains tax on foreigners selling property in the U.K. to curb rising house prices in the capital, Sky News television first reported earlier this month. Overseas demand is adding to pressure on a market experiencing a shortage of supply.
“There are parts of the London property market now which are entirely divorced from and dislocated from the rest of the economy,” Clegg said. “That’s partly because they’re driven by market forces which are global and by very, very large amounts of money flowing into the residential property market as investment.”
Clegg’s Liberal Democrats, the minority party in the ruling coalition, have made higher taxes on the most expensive properties a key policy with demands for a so-called mansion tax on homes valued at more than 2 million pounds ($3.2 million.) Their Conservative partners have rejected the idea.
Mersch Says ECB’s Stress Tests May Cover Three-Year Period
European Central Bank Executive Board member Yves Mersch said stress tests on euro-area banks will probably simulate three years of negative economic conditions as part of a check on the financial system’s health.
“Our deliberations are tending toward these tests having a three-year horizon, to the end of 2016,” Mersch, who is helping to oversee the ECB’s preparations to become the currency bloc’s bank supervisor, said he sees the horizon extending to the end of 2016.
He made the remarks at a conference in Frankfurt yesterday. Mersch said there would be a base scenario and a so-called stress- or worst-case scenario.
Setting a time horizon should help banks gauge which definition of capital under international rules will be used in the stress tests.
By the end of 2016 banks need to hold 5.125 percent common equity core tier 1 capital, which includes a buffer against losses. That rises to 5.75 percent on Jan. 1, 2017.
East Europe Loan Growth Needs to Be Monitored, Nowotny Says
European Central Bank Governing Council member Ewald Nowotny said strong loan growth in some eastern European countries needs close monitoring by regulators to avoid another bubble like the one that burst in 2009.
It was difficult to tell whether some emerging European economies had been overheating or converging with western neighbors before the recession that started in most of eastern Europe in 2009, Nowotny, the Austrian central bank’s governor, told journalists on the sidelines of a conference in Vienna. That process may still blur the picture, he said.
Western European lenders led by Austria’s Raiffeisen Bank International AG, Erste Group Bank AG and UniCredit Bank Austria AG bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. Bad loans have shot up since 2009 and are weighing on bank balance sheets.
Credit was still contracting in Hungary, the Baltics and Croatia in the second quarter of this year and grew less than 5 percent per year in Poland and Slovakia, the Vienna Initiative group of international lenders said last month. It continues to grow by more than 15 percent in Turkey, Russia and Belarus.
The European Union’s eastern members that aren’t using the euro -- including Poland, Hungary, the Czech Republic, Bulgaria, Romania and Croatia -- should consider joining the ECB-led joint bank supervision, Nowotny said.
Comings and Goings
Regulator Must Answer for Co-Op Bank Chairman, Lawmaker Says
Regulators must explain why they approved Paul Flowers, a Methodist minister accused by a Sunday newspaper of buying drugs, as an appropriate person to run a British bank, a U.K. lawmaker said.
Flowers was the chairman of Co-Operative Bank Plc from March 2010 until he was replaced by Richard Pym in June.
The Mail on Sunday reported Nov. 17 Flowers was filmed in his car buying illegal drugs in Leeds, northern England, days after his appearance before Parliament’s Treasury Select Committee on Nov. 6 over the bank’s performance. Flowers, 63, apologized in a statement issued through the church.
Pat McFadden, a Labour lawmaker who sits on the Treasury Committee named the Bank of England’s Prudential Regulation Authority as responsible for the Co-Op Bank’s oversight. He questioned how Flowers became the bank chairman and added that he didn’t expect Flowers to be recalled to the committee to give further evidence.
Officials at the PRA declined to comment. Flowers was approved by the Financial Services Authority, which has since been disbanded, with some of its regulatory powers taken on by the Bank of England’s PRA.
In his testimony to the committee two weeks ago, Flowers said he didn’t have the skills of a banker, when asked about his financial experience, which included working at Westminster Bank, a forerunner to Royal Bank of Scotland Group Plc’s NatWest bank, before becoming a Methodist minister; he said his expertise was probably “out of date.”
Flowers said he still considered himself a “fit and proper” person to run a lender, even though he had accepted responsibility with his resignation, he told the committee.
“This year has been incredibly difficult, with a death in the family and the pressures of my role with the Co-Operative Bank,” Flowers said in a statement yesterday. “At the lowest point in this terrible period, I did things that were stupid and wrong. I am sorry for this and I am seeking professional help, and apologize to all I have hurt or failed by my actions.”
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